Bhimani, Horngren,
Datar and Rajan,
Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012
Actual costs incurred Same lump sum regardless of output level Flexible budget (Budgeted input allowed for actual output achieved × Budgeted rate) Allocated (Budgeted input allowed for actual output achieved × Budgeted rate) Fixed
Overhead DKr 27,600
DKr 24,000
DKr 24,000
(7,460 × 0.80 × DKr 3.75)
DKr 22,380
↑ DKr 3,600 U ↑
↑
DKr 1,620 U
↑
Spending variance Never a variance
Production-volume variance The spending variances for variable and fixed overhead are both unfavourable. This means that Danskmat had increases in either or both the cost of individual items such as telephone calls and vehicle fuel)
in the overhead cost pools, or higher than budgeted usage of these individual items per unit of the allocation base (delivery time. The favourable efficiency variance for variable-overhead costs results from more efficient use of the cost allocation base – each delivery takes 0.75 hours versus a budgeted 0.80 hours.
2 Danskmat best manages its fixed-overhead costs by long-term planning of capacity rather than day-to-day decisions. This involves planning to undertake only value- added fixed-overhead activities and then determining the appropriate level for those activities. Most fixed-overhead costs are committed well before they are incurred. In contrast,
for variable overhead, a mix of long-run planning and daily monitoring of the use of individual items is required to manage costs efficiently. Danskmat plans to undertake only value-added variable-overhead activities (a long-run focus) and then manage the cost drivers of those activities in the most efficient way (a short-run focus.
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