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Chapter 8: Problem 9

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

Short Answer

Expert verified
The flexible-budget variance is the same amount as the spending variance for fixed manufacturing overhead because both variances measure the difference between actual fixed overhead costs and budgeted fixed overhead costs. Since fixed overhead costs do not vary with production levels, the budgeted fixed overhead costs will be the same at any activity level, making the two variances identical.

Step by step solution

01

Understand fixed manufacturing overhead cost structure

Fixed manufacturing overhead costs are those costs that remain constant over a period regardless of the level of production. Examples of fixed manufacturing overhead costs include salaries of production managers, depreciation on manufacturing equipment, and property taxes on the manufacturing facility.
02

Calculating the flexible-budget variance

The flexible-budget variance is calculated by taking the difference between the actual fixed manufacturing overhead costs incurred and the budgeted fixed manufacturing overhead cost. In equation form: Flexible-budget variance = Actual fixed overhead costs - Budgeted fixed overhead costs
03

Calculating the spending variance

Spending variance is calculated by taking the difference between the actual fixed manufacturing overhead costs incurred and the budgeted fixed overhead costs at the actual level of activity. Since fixed overhead costs do not change with the level of production, the budgeted fixed overhead cost remains the same regardless of the actual level of activity. Hence: Spending variance = Actual fixed overhead costs - Budgeted fixed overhead costs at actual activity level
04

Compare the two variances

Comparing the flexible-budget variance and the spending variance calculations, we can see they are identical: Flexible-budget variance = Actual fixed overhead costs - Budgeted fixed overhead costs Spending variance = Actual fixed overhead costs - Budgeted fixed overhead costs at actual activity level Since fixed overhead costs do not vary with production levels, the budgeted fixed overhead costs will be the same at any activity level. Therefore, the spending variance for fixed manufacturing overhead is the same as the flexible-budget variance. In conclusion, the flexible-budget variance is the same amount as the spending variance for fixed manufacturing overhead because both variances measure the difference between actual fixed overhead costs and budgeted fixed overhead costs, which do not change with production levels.

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Key Concepts

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

Fixed Manufacturing Overhead
Fixed manufacturing overhead represents those costs incurred by a manufacturing facility that do not vary with the level of production output. These costs remain constant over a specific period of time.
Some typical components include:
  • Salaries of production management and supervisory staff.
  • Depreciation on manufacturing equipment, which does not fluctuate month by month.
  • Property taxes levied on the manufacturing premises, generally set annually.
These fixed costs are imperative for the production process, irrespective of how much you produce.
This characteristic of being 'fixed', makes them straightforward to budget, ensuring stability in planning and operations.
Spending Variance
Spending variance deals directly with deviations in cost expectations. Essentially, it reflects the difference between what was actually spent and what was planned to be spent on fixed manufacturing overhead.
The formula to capture this variance is:
  • Spending Variance = Actual Fixed Overhead Costs - Budgeted Fixed Overhead Costs at Actual Activity Level
However, because these costs do not change irrespective of the activity level, the budgeted figure remains constant.
Thus, any difference represents overspending or saving. This type of variance helps businesses control costs and identify areas for financial efficiency.
Cost Accounting
Cost accounting acts as a fundamental pillar in understanding financial patterns and controlling costs within a business.
This discipline captures, records, and analyzes all costs associated with the production process.
In terms of manufacturing overhead, cost accounting scrutinizes how effectively a business allocates resources, ensuring that overhead costs are not just kept in check but also utilized optimally.
  • Enhanced decision-making is facilitated, providing insights into cost efficiency or necessary operational adjustments.
  • Transparency in cost structure can lead to better budgeting practices.
With these objectives, cost accounting plays a crucial role in the management of fixed manufacturing overhead and the analysis of variances.
Budgeted Costs
Budgeted costs present a financial blueprint for a company鈥檚 operations. They are estimated expenditures associated with the production process within a specific period.
When budgeting fixed manufacturing overhead, these costs are pre-determined, providing a target for actual expenses to align with. The determination of budgeted costs includes:
  • Forecasting based on past data to predict future overhead expenses.
  • Inclusion of fixed elements like salaries, taxes, and depreciation which remain stable over time.
Effectively designed budgeted costs promote financial discipline and set a benchmark against which all actual expenditures, especially within fixed manufacturing overhead, can be evaluated.
This not only aids in assessing financial performance but also guides strategic planning and decision-making.

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Most popular questions from this chapter

Audrina's Fleet Feet, Inc., produces dance shoes for stores all over the world. While the pairs of shoes are boxed individually, they are crated and shipped in batches. The shipping department records both variable direct batch-level costs and fixed batch-level overhead costs. The following information pertains to shipping department costs for 2017 . $$\begin{array}{lcc} & \text { Static-Budget Amounts } & \text { Actual Results } \\ \hline \text { Pairs of shoes shipped } & 225,000 & 180,000 \\ \text { Average number of pairs of shoes per crate } & 15 & 10 \\ \text { Packing hours per crate } & 0.9 \text { hours } & 1.1 \text { hour } \\\ \text { Variable direct cost per hour } & \$ 18 & \$ 16 \\ \text { Fixed overhead cost } & \$ 54,000 & \$ 56,500 \end{array}$$ 1\. What is the static budget number of crates for \(2017 ?\) 2\. What is the flexible budget number of crates for \(2017 ?\) 3\. What is the actual number of crates shipped in \(2017 ?\) 4\. Assuming fixed overhead is allocated using crate-packing hours, what is the predetermined fixed overhead allocation rate? 5\. For variable direct batch-level costs, compute the price and efficiency variances. 6\. For fixed overhead costs, compute the spending and the production-volume variances.

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.

Cavio is a cloud service provider that offers computing resources to handle enterprise-wide applications. For March 2017 , Cavio estimates that it will provide 18,000 RAM hours of services to clients. The budgeted variable overhead rate is \(\$ 6\) per RAM hour. At the end of March, there is a \(\$ 500\) favorable spending variance for variable overhead and a \(\$ 1,575\) unfavorable spending variance for fixed overhead. For the services actually provided during the month, 14,850 RAM hours are budgeted and 15,000 RAM hours are actually used. Total actual overhead costs are \(\$ 119,875\). 1\. Compute efficiency and flexible-budget variances for Cavio's variable overhead in March 2017. Will variable overhead be over- or underallocated? By how much? 2\. Compute production-volume and flexible-budget variances for Cavio's fixed overhead in March 2017. Will fixed overhead be over- or underallocated? By how much?

How does the planning of fixed overhead costs differ from the planning of variable overhead costs ?

Culpepper Corporation had the following inventories at the beginning and end of the month of January: $$\begin{array}{lrr} & \text { January 1 } & \text { January 31 } \\ \hline \text { Finished goods } & \$ 125,000 & \$ 117,000 \\ \text { Work-in-process } & 235,000 & 251,000 \\ \text { Direct materials } & 134,000 & 124,000 \end{array}$$ The following additional manufacturing data was available for the month of January. $$\begin{array}{ll} \text {Direct materials purchased} & \text {\$ 189,000} \\ \text {Transportation in} & \text {3,000}\\\ \text {Direct labor} & \text {400,000}\\\ \text {Actual factory overheadd} & \text {175,000}\\\ \end{array}$$ Culpepper Corporation applies factory overhead at a rate of \(40 \%\) of direct labor cost, and any overapplied or underapplied factory overhead is deferred until the end of the year. Culpepper's balance in its factory overhead control account at the end of January was: 1\. \(\$ 15,000\) overapplied. 2\. \(\$ 15,000\) underapplied. 3\. \(\$ 5,000\) underapplied. 4\. \(\$ 5,000\) overapplied.
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