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# Flexible Budgets,

and
Management Control

1.
2.
3.

4.

## Explain the similarities and differences in

planning variable and fixed overhead costs
Develop budgeted variable and fixed
efficiency variance and the variable
spending variance and the fixed overhead
production-volume variance
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5.

6.

7.
8.

## Show how the 4-variance analysis approach

during the period
Explain the relationship between the salesvolume variance and the productionvolume variance
Calculate variances in activity-based
costing
Examine the use of overhead variances in
nonmanufacturing settings
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## To effectively plan variable overhead costs,

managers should focus on activities that add
value and eliminate those that do not.
Fixed overhead planning is similar ~ plan only
for essential activities and plan to be as
efficient as possible.

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## is a costing system that

Traces direct costs to output by multiplying
the standard prices or rate by the standard
quantities of inputs allowed for actual outputs
produced.
Allocates overhead costs on the basis of the
standard quantities of the allocation bases
allowed for the actual outputs produced.

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1.
2.

3.

4.

## Choose the period to be used for the

budget.
Select the cost-allocation bases to use in
output produced.
associated with each cost-allocation
base.
Compute the rate per unit of each costallocation base used to allocate variable
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measures the difference between actual variable

## This variance can be further broken down into the

Variable Overhead Efficiency Variance and the

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## Variable overhead efficiency variance is the difference

between the actual quantity of the variable overhead
cost-allocation base used and the budgeted quantity of
the variable overhead cost-allocation base allowed for
the actual output X the budgeted variable overhead cost
per unit of the cost-allocation base.

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## Variable overhead spending variance is the

difference between actual and budgeted variable
overhead cost per unit of the cost-allocation
base, multiplied by the actual quantity of

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## Fixed overhead costs are, by definition, a lump

sum of costs that remain unchanged for a given
period despite potentially wide changes in
activity within the relevant range.
These costs are fixed in the sense that, unlike
variable costs, fixed costs do not automatically
increase or decrease with the level of activity
within the relevant range.

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1.
2.

3.

4.

## Choose the period to be used for the

budget.
Select the cost-allocation bases to use in
allocating fixed overhead costs to output
produced.
associated with each cost-allocation
base.
Compute the rate per unit of each costallocation base used to allocate fixed
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## Fixed overhead flexible-budget variance is the

difference between actual fixed overhead costs
and fixed overhead costs in the flexible budget.
The fixed overhead spending variance is the same
variance as the Fixed Overhead Flexible-Budget
Variance

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## Production-volume variance is the difference

between budgeted fixed overhead and fixed
overhead allocated on the basis of actual output
produced.
This variance is also known as the denominatorlevel variance.

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## Interpretation of this variance is difficult due to

the nature of the costs involved and how they
are budgeted.
Fixed costs are by definition somewhat
inflexible. While market conditions may cause
production to flex up or down, the associated
fixed costs remain the same.
Fixed costs may be set years in advance, and
may be difficult to change quickly.
Contradiction: Despite this, examination of the
fixed overhead budget formulae reveals that it is
budgeted similar to a variable cost.
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4-VARIANCE
ANALYSIS
SPENDING
VARIANCE

EFFICIENCY
VARIANCE

PRODUCTIONVOLUME
VARIANCE

VARIABLE

YES

YES

NEVER A
VARIANCE

FIXED

YES

NEVER A
VARIANCE

YES

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## You may recall from chapter 7 that the static

budget variance (the difference between the
static budget and the actual results) was
\$93,100 Unfavorable for Webb Company, our
sample company.
The sales-volume variance (the difference
between the flexible budget and the static
budget) was \$64,000 Unfavorable.
The sales-volume variance consists of two
components: The operating-income volume
variance and the production-volume variance.
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## Activity-based costing systems focus on

individual activities as the fundamental cost
objects.
Variances are calculated for each activity

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## Nonmanufacturing companies can benefit

manufacturing companies can.
Variance analysis can be used to examine
pricing, managing costs and the mix of
products.
Output measures will be different and can be
passenger-miles flown, patient days
provided, rooms-days occupied, ton-miles of
freight hauled, etc.
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TERMS TO LEARN

## PAGE NUMBER REFERENCE

Denominator level

Page 292

Denominator-level variance

Page 298

variance

Page 297

variance

Page 297

Operating-income volume
variance

Page 307

Production-volume variance

Page 298

Standard costing

Page 290

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TERMS TO LEARN

Page 305

variance

Page 293

Page 293

variance

Page 295