Solutions Ch8

CHAPTER 8

FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND

MANAGEMENT CONTROL

8-1

1.

2.

Effective planning of variable overhead costs involves:

Planning to undertake only those variable overhead activities that add value for customers

using the product or service, and

Planning to use the drivers of costs in those activities in the most efficient way.

8-2

At the start of an accounting period, a larger percentage of fixed overhead costs are

locked-in than is the case with variable overhead costs. When planning fixed overhead costs, a

company must choose the appropriate level of capacity or investment that will benefit the

company over a long time. This is a strategic decision.

8-3

In a standard costing system overhead costs are allocated on the basis of the standard

overhead-cost rates multiplied by the standard quantities of the allocation bases allowed for the

actual outputs produced.

8-4

1.

2.

3.

4.

8-5

a.

b.

8-6

Steps in developing a budgeted variable-overhead cost rate are:

Choose the period to be used for the budget,

Select the cost-allocation bases to use in allocating variable overhead costs to the output

produced,

the variable overhead costs associated with each cost-allocation base, and

Compute the rate per unit of each cost-allocation base used to allocate variable overhead

costs to output produced.

Two factors affecting the spending variance for variable manufacturing overhead are:

Price changes of individual inputs (such as energy and indirect materials) included in

variable overhead relative to budgeted prices.

Percentage change in the actual quantity used of individual items included in variable

overhead cost pool, relative to the percentage change in the quantity of the cost driver of

the variable overhead cost pool.

Possible reasons for a favorable variable-overhead efficiency variance are:

• Workers more skillful in using machines than budgeted,

• Production scheduler was able to schedule jobs...