Managerial Accounting Ch8 solution

CHAPTER 8
FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND
MANAGEMENT CONTROL
8-1

Effective planning of variable overhead costs involves:
1. Planning to undertake only those variable overhead activities that add value for customers using the product or service, and
2. 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
The key differences are how direct costs are traced to a cost object and how indirect costs are allocated to a cost object:
Direct costs
Indirect costs

Actual Costing
Actual prices
× Actual inputs used
Actual indirect rate
× Actual inputs used

Standard Costing
Standard prices
× Standard inputs allowed for actual output
Standard indirect cost-allocation rate
× Standard quantity of cost-allocation base allowed for actual output

8-4

Steps in developing a budgeted variable-overhead cost rate are:
1. Choose the period to be used for the budget,
2. Select the cost-allocation bases to use in allocating variable overhead costs to the output produced,
3. Identify the variable overhead costs associated with each cost-allocation base, and
4. Compute the rate per unit of each cost-allocation base used to allocate variable overhead costs to output produced.

8-5

Two factors affecting the spending variance for variable manufacturing overhead are:
a. Price changes of individual inputs (such as energy and indirect materials) included in variable overhead relative to budgeted prices.
b. 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