Decision Points

The following question-and-answer format summarizes the chapter’s learning objectives. Each decision presents a key question related to a learning objective. The guidelines are the answer to that question.

Decision

Guidelines

  1. How do managers plan variable overhead costs and fixed overhead costs?

Planning of both variable and fixed overhead costs involves efficiently undertaking activities that add value. For variable-cost planning, managers plan costs throughout the budget period; for fixed-cost planning, most key decisions are made before the start of the period.

  1. How are budgeted variable overhead and budgeted fixed overhead cost rates calculated?

The budgeted variable (fixed) overhead cost rate is calculated by dividing the budgeted variable (fixed) overhead costs by the denominator level of the cost-allocation base.

  1. What variances can be calculated for variable overhead costs?

The variable overhead efficiency variance is the difference between the actual quantity of the cost-allocation base used relative to the budgeted quantity of the cost-allocation base to produce the actual output, multiplied by the budgeted variable overhead cost per unit of the allocation base. The variable overhead spending variance is the difference between the actual variable overhead cost per unit of the cost-allocation base relative to the budgeted variable overhead cost per unit of the cost-allocation base multiplied by the actual quantity of variable overhead cost-allocation base used.

  1. What variances can be calculated for fixed overhead costs?

The difference between the budgeted and actual amount of fixed overhead is the flexible-budget variance, which equals the spending variance. The production-volume variance is the difference between the budgeted fixed overhead and the fixed overhead allocated on the basis of actual output produced.

  1. What is the most detailed way for a company to reconcile actual overhead incurred with the amount allocated during a period?

The most detailed analysis is a 4-variance analysis comprising spending and efficiency variances for variable overhead costs and spending and production-volume variances for fixed overhead costs.

  1. How is the sales-volume variance related to the production-volume variance?

The sales-volume variance can be subdivided into the production-volume variance and the operating-income volume variance.

  1. How can variance analysis be used in an activity-based costing system?

Using output and input measures for an activity, flexible budgets and variance analysis in ABC systems give insight into why actual activity costs differ from budgeted activity costs.

  1. How are overhead variances useful in nonmanufacturing settings?

Fixed overhead variances are especially useful to control costs in service settings, where using capacity effectively is the key to profitability. In all cases, the information provided by variances are supplemented by nonfinancial metrics.