Cost Accounting (14th Edition)

8
Flexible Budgets, Overhead Cost
Variances, and Management Control
Learning Objectives
1. Explain the similarities and differences
in planning variable overhead
costs and fixed overhead costs
2. Develop budgeted variable overhead
cost rates and budgeted
fixed overhead cost rates
3. Compute the variable overhead
flexible-budget variance, the variable
overhead efficiency variance,
and the variable overhead spending
variance
4. Compute the fixed overhead
flexible-budget variance, the fixed
overhead spending variance, and
the fixed overhead productionvolume
variance
5. Show how the 4-variance analysis
approach reconciles the actual
overhead incurred with the overhead
amounts allocated during
the period
6. Explain the relationship between
the sales-volume variance and the
production-volume variance
7. Calculate overhead variances in
activity-based costing
8. Examine the use of overhead variances
in nonmanufacturing settings
What do this week’s weather forecast and organization
performance have in common?
Most of the time, reality doesn’t match expectations. Cloudy skies
that cancel a little league game may suddenly let the sun shine
through just as the vans are packed. Jubilant business owners may
change their tune when they tally their monthly bills and discover
that skyrocketing operation costs have significantly reduced their
profits. Differences, or variances, are all around us.
For organizations, variances are of great value because they
highlight the areas where performance most lags expectations. By
using this information to make corrective adjustments, companies
can achieve significant savings, as the following article shows.
Overhead Cost Variances Force Macy’s to Shop
for Changes in Strategy 1
Managers frequently review the differences, or variances, in overhead
costs and make changes in the operations of a business. Sometimes
staffing levels are increased or decreased, while at other times
managers identify ways to use fewer resources like, say, office
supplies and travel for business meetings that don’t add value to the
products and services that customers buy.
At the department-store chain Macy’s, however, managers analyzed
overhead cost variances and changed the way the company purchased
the products it sells. In 2005, when Federated Department Stores and
the May Department Store Company merged, Macy’s operated seven
buying offices across the United States. Each of these offices was
responsible for purchasing some of the clothes, cosmetics, jewelry, and
many other items Macy’s sells. But overlapping responsibilities, seasonal
buying patterns (clothes are generally purchased in the spring and fall)
and regional differences in costs and salaries (for example, it costs more
for employees and rent in San Francisco than Cincinnati) led to frequent
and significant variances in overhead costs.
These overhead costs weighed on the company as the retailer
struggled with disappointing sales after the merger. As a result,
Macy’s leaders felt pressured to reduce its costs that were not directly
related to selling merchandise in stores and online.
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1 Sources: Boyle, Matthew. 2009. A leaner Macy’s tries to cater to local tastes. BusinessWeek.com, September 3;
Kapner, Suzanne. 2009. Macy’s looking to cut costs. Fortune, January 14. http://money.cnn.com/2009/01/14/news/
companies/macys_consolidation.fortune/; Macy’s 2009 Corporate Fact Book. 2009. Cincinnati: Macy’s, Inc., 7.