CHAPTER 8
FLEXIBLE BUDGETS, OVERHEAD COST VARIANCES, AND
MANAGEMENT CONTROL
8-1How do managers plan for variable overhead costs?
Effective planning of variable overhead costs involves:
1.Planning to undertake only those variable overhead activities that add value for
customers using the product or service, and
2.Planning to use the drivers of costs in those activities in the most efficient way.
8-2How does the planning of fixed overhead costs differ from the planning of variable
overhead costs?
At the start of an accounting period, a larger percentage of fixed overhead costs are locked-in
than is the case with variable overhead costs. When planning fixed overhead costs, a company
must choose the appropriate level of capacity or investment that will benefit the company over a
long time. This is a strategic decision.
8-3How does standard costing differ from actual costing?
The key differences are how direct costs are traced to a cost object and how indirect costs
are allocated to a cost object:
Actual CostingStandard Costing
Direct costsActual prices
× Actual inputs used
Standard prices
× Standard inputs allowed for actual output
Indirect costsActual indirect rate
× Actual inputs used
Standard indirect cost-allocation rate
× Standard quantity of cost-allocation base
allowed for actual output
8-4What are the steps in developing a budgeted variable overhead cost-allocation rate?
Steps in developing a budgeted variable-overhead cost rate are:
1.Choose the period to be used for the budget,
2.Select the cost-allocation bases to use in allocating variable overhead costs to the
output produced,
3.Identify the variable overhead costs associated with each cost-allocation base, and
4.Compute the rate per unit of each cost-allocation base used to allocate variable
overhead costs to output produced.
8-5What are the factors that affect the spending variance for variable manufacturing
overhead?
Two factors affecting the spending variance for variable manufacturing overhead are:
a. Price changes of individual inputs (such as energy and indirect materials) included in
variable overhead relative to budgeted prices.
8-