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Chapter 8: Problem 4

What are the steps in developing a budgeted variable overhead cost-allocation rate?

Short Answer

Expert verified
To develop a budgeted variable overhead cost-allocation rate, follow these steps: 1. Identify the variable overhead costs that vary with production levels. 2. Determine a suitable cost driver that represents changes in variable overhead expenses with changes in production level. 3. Calculate the total budgeted variable overhead costs by estimating variable cost per unit and multiplying it by the projected volume of the cost driver. 4. Calculate the total budgeted cost driver for the upcoming period by multiplying the budgeted number of units to be produced with the budgeted cost driver per unit. 5. Calculate the budgeted variable overhead cost-allocation rate by dividing the total budgeted variable overhead costs by the total budgeted cost driver: \(Budgeted\: Variable\: Overhead\: Cost-Allocation\: Rate = \frac{Total\: Budgeted\: Variable\: Overhead\: Costs}{Total\: Budgeted\: Cost\: Driver}\)

Step by step solution

01

Identify the Variable Overhead Costs

Variable overhead costs are the indirect costs associated with the production process that vary with changes in production levels. Examples of variable overhead costs include indirect materials, supplies, and utilities. The first step involves identifying these costs and listing them down. Make sure to only include costs that vary with production levels, not fixed overhead expenses.
02

Determine the Cost Driver

A cost driver is an activity or factor that drives the cost. For variable overhead costs, you need to determine a suitable cost driver that changes with the production level. Common cost drivers used for variable overhead costs are direct labor hours, machine hours, or units produced. Choose a cost driver that best represents the changes in variable overhead expenses with changes in production level.
03

Calculate the Total Budgeted Variable Overhead Costs

Once you have identified the variable overhead costs and selected a cost driver, you need to estimate the total budgeted variable overhead costs for the upcoming period. To do this, estimate the variable cost per unit for each item and multiply it by the projected volume of the cost driver (e.g., direct labor hours, machine hours, or units produced).
04

Calculate the Total Budgeted Cost Driver

Next, calculate the total budgeted cost driver for the upcoming period. This can be done by multiplying the budgeted number of units to be produced with the budgeted cost driver per unit (e.g., total labor hours per unit or total machine hours per unit).
05

Develop the Budgeted Variable Overhead Cost-Allocation Rate

Finally, to calculate the budgeted variable overhead cost-allocation rate, divide the total budgeted variable overhead costs (from Step 3) by the total budgeted cost driver (from Step 4). Budgeted Variable Overhead Cost-Allocation Rate = \(\frac{Total\: Budgeted\: Variable\: Overhead\: Costs}{Total\: Budgeted\: Cost\: Driver}\) After calculating the budgeted variable overhead cost-allocation rate, you can use this rate to allocate variable overhead costs to each unit of the production to determine the total product cost.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Variable Overhead Costs
Variable overhead costs are the indirect costs that occur in the production process, which fluctuate with production levels. These costs differ from fixed overhead costs, which remain constant regardless of output levels. Examples of variable overhead costs can include expenses like:
  • Indirect materials
  • Supplies
  • Utilities
Identifying variable overhead costs involves recognizing those expenses that increase or decrease in direct proportion to the amount of production. This characteristic helps in better budgeting and financial planning as expenses can be foreseen depending on expected output levels.
Cost Driver
A cost driver is an element or activity that has a direct impact on the cost incurred during production. Identifying the right cost driver for variable overhead costs is crucial because it leads to more accurate financial management and resource allocation. Common cost drivers in determining variable overhead include:
  • Direct labor hours
  • Machine hours
  • Units produced
Selecting an appropriate cost driver greatly depends on which element best reflects the changes in overhead cost with different output levels. For instance, if the expenses are most related to the use of equipment, machine hours might serve as an ideal cost driver.
Budgeted Variable Overhead Costs
Determining the estimated variable overhead costs for a specific period involves calculating how much you expect to spend based on the cost driver identified. The process usually involves:
  • Calculating the variable cost per unit for each overhead expense
  • Multiplying this cost by the expected volume of the chosen cost driver
This helps in setting up a budget that aligns with the expected production level. The accuracy in estimating these costs affects how well an organization can control expenses and predict profit margins.
Production Levels
Production levels refer to the quantity of output that a company plans to produce within a specified time frame. Variable overhead costs and their allocation are directly influenced by production levels. When setting production budgets, it鈥檚 important to consider:
  • Market demand forecasts
  • Resource availability
  • Operational capacities
Matching production levels with variable expenses helps in achieving effective cost control and optimizing manufacturing processes. A close alignment naturally leads to a more precisely developed budgeted variable overhead cost-allocation rate.

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Most popular questions from this chapter

Carpenter Company uses standard costing. The company has a manufacturing plant in Georgia. Standard labor-hours per unit a re \(0.50,\) and the variable overhead rate for the Georgia plant is \(\$ 3.50\) per direct labor-hou. Fixed overhead for the Georgia plant is budgeted at \(\$ 1,800,000\) for the year. Firm management has always used variance analysis as a performance measure for the plantt Tom Saban has just been hired as a new controller for Carpenter Company. Tom is good friends with the Georgia plant manager and wants him to get a favorable review. Tom decides to underestimate production, and budgets annual output of 1,200,000 units. His explanation for this is that the economy is slowing and sales are likely to decrease. At the end of the year, the plant reported the following actual results: output of 1,500,000 using 760,000 labor-hours in total, at a cost of \(\$ 2,700,000\) in variable overhead and \(\$ 1,850,000\) in fixed overhead . 1\. Compute the budgeted fixed cost per labor-hour for the fixed overhead. 2\. Compute the variable overhead spending variance and the variable overhead efficiency variance. 3\. Compute the fixed overhead spending and volume variances. 4\. Compute the budgeted fixed cost per labor-hour for the fixed overhead if Tom Saban had estimated production more realistically at the expected sales level of 1,500,000 units. 5\. Summarize the fixed overhead variance based on both the projected level of production of 1,200,000 units and 1,500,000 units. 6\. Did Tom Saban's attempt to make his friend, the plant manager, look better work? Why or why not? 7\. What do you think of Tom Saban's behavior overall?

(CPA, adapted) The Beal Manufacturing Company's costing system has two direct- cost categories: direct materials and direct manufacturing labor. Manufacturing overhead (both variable and fixed) is allocated to products on the basis of standard direct manufacturing labor-hours (DLH). At the beginning of 2017, Beal adopted the following standards for its manufacturing costs: The denominator level for total manufacturing overhead per month in 2017 is 37,000 direct manufacturing labor-hours. Beal's budget for January 2017 was based on this denominator level. The records for January indicated the following: 1\. Prepare a schedule of total standard manufacturing costs for the 7,600 output units in January 2017 . 2\. For the month of January 2017 , compute the following variances, indicating whether each is favorable (F) or unfavorable (U): a. Direct materials price variance, based on purchases b. Direct materials efficiency variance c. Direct manufacturing labor price variance d. Direct manufacturing labor efficiency variance e. Total manufacturing overhead spending variance f. Variable manufacturing overhead efficiency variance g. Production-volume variance

Why is the flexible-budget variance the same amount as the spending variance for fixed manufacturing overhead?

"The production-volume variance should always be written off to cost of Goods Sold." Do you agree? Explain.

As part of her annual review of her company's budgets versus actuals, Mary Gerard isolates unfavorable variances with the hope of getting a better understanding of what caused them and how to avoid them next year. The variable overhead efficiency variance was the most unfavorable over the previous year, which Gerard will specifically be able to trace to: a. Actual overhead costs below applied overhead costs. b. Actual production units below budgeted production units. c. Standard direct labor hours below actual direct labor hours. d. The standard variable overhead rate below the actual variable overhead rate.
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