Kế toán, kiểm toán - Chapter 11: Standard costs for control: flexible budgets and manufacturing overhead

Chapter 11Standard costs for control: flexible budgets and manufacturing overhead1Flexible budgetsUsed to control overheadsA detailed budget that is prepared for a range of levels of activitiesCompared to a static budget which relates to one specific planned level of activityOften restricted to the practice of flexing overhead costs to various levels of activity23Advantages of flexible budgetsAllows us to select the most appropriate benchmark for cost controlProvides the correct basis for comparing actual and expected costs, for the actual level of activity4Input measures and output measuresUnits of output are not usually a meaningful measure of the level of activity in a multiproduct firmOutput can be measured as the standard quantity of input allowed, given actual output5Flexible overhead budgetFlexible budget report: shows flexible overhead budgets at various levels of activityFormula flexible budget: allows us to calculate total overhead at various levels of activity using a formula6Flexible overhead budget78Overhead application in a standard costing systemOverhead is applied to inventory using the standard overhead rateBased on the standard quantity of input allowed, given actual outputThe activity chosen for the standard overhead rate should be a cost driverAny activity or factor that causes cost to be incurred9Calculating variable overhead variancesFlexible budgets provide a tool for controlling manufacturing overhead costsFour overhead variances can be calculated to compare the actual overhead cost incurred with the flexible budget10Calculating variable overhead cost variancesVariable overhead spending varianceA measure of the difference between the actual variable overhead and the standard variable overhead rate multiplied by actual activity = Actual variable overhead - (AH x SVR)Where AH = actual direct labour hours SVR = standard variable overhead ratecontinued11Calculating variable overhead cost variancesVariable overhead efficiency varianceA measure of the difference between the actual activity and the standard activity allowed, given the actual output multiplied by the standard variable overhead rate= SVR (AH – SH)Where SH = standard direct labour hours allowed for actual output1213Interpreting variable overhead variancesSpending varianceActual cost of variable overhead is greater/less than expected, after adjusting for the actual quantity of cost driver usedUsed to control variable overheadEfficiency variance The cost effects of excessive or low use of the particular activity (cost driver)The spending variance is the real control variance for variable overhead14Calculating fixed overhead variancesFixed overhead budget varianceThe difference between actual fixed overhead and budgeted fixed overhead= actual fixed overhead - budgeted fixed overheadcontinued15Calculating fixed overhead variancesFixed overhead volume variance The difference between budgeted fixed overhead and fixed overhead applied to production= budgeted fixed overhead - applied fixed overhead1617Interpreting fixed overhead variancesFixed overhead budget varianceUsed for controlAssumes fixed overhead will not change as activity variesFixed overhead volume variance Standard cost driver allowed for actual output is more/less than the planned level of productionReconciles the two purposes of costing systems: product costing and cost control1819Standard costs for product costingCosts of direct material, direct labour and manufacturing overhead are all charged to inventory at standard costs, not actual costsVariances are closed off at end of accounting periodTo cost of goods sold expense, or prorate between WIP, FG and COGS20Criticisms of standard costingVariances are too aggregated and concentrate on consequences rather than the causes of problemsVariance reports are too late to be usefulStandard costing systems tend to focus too heavily on cost minimisationcontinued21Criticisms of standard costingStandard costing systems take a departmental perspective rather than a process perspectiveToo much emphasis is placed on the cost and efficiency of direct labourOverhead variances give limited cost control informationcontinued22Criticisms of standard costingDoes not explicitly encourage continuous improvementStandard costs become outdated quickly due to shorter product life cyclesStandard costing systems do not capture the full costs of materials23Advantages of standard costingProvides a good basis for cost comparisonsEnables managers to use management by exceptionProvides a basis for performance evaluation and determining bonusescontinued24Advantages of standard costingParticipation in setting standards and assigning responsibility can have motivational effects on employees May lead to more stable product costs compared to using actual costsCan be used for external reporting25Activity-based budgetingA process of building up budgets from the major activities of the businessUses principles of ABC to estimate a firm’s future demand for resourcesABB works in reverse to ABCStart with analysis of the market, estimate of sales demand, estimate production activities, required level of production and resources262728Activity-based budgetingInaccuracies in ABBSpending versus consumption of resourcesThe cost of unused resources are not included in ABC product costsEstimates of non-manufacturing activities may be distortedShared resources may not be accounted for accuratelyInformation requirements for ABB are high compared to traditional budgeting systemscontinued29Activity-based budgetingPerformance evaluation under ABBNeed to compare actual activity costs to budgeted costsBudgeted costs should be based on flexible budgets which show the budgeted cost of activities as various cost drivers changeSuch flexible budgets have the potential to be very complex30