Cost Accounting (14th Edition)

In early 2009, the company announced plans to consolidate its
network of seven buying offices into one location in New York. With
all centralized buying and merchandise planning in one location,
Macy’s buying structure and overhead costs were in line with
how many other large chains operate, including JCPenney
and Kohl’s. All told, the move to centralized buying
would generate $100 million in annualized cost savings
for the company.
While centralized buying was applauded by industry
experts and shareholders, Macy’s CEO Terry Lundgren
was concerned about keeping a “localized flavor” in his
stores. To ensure that nationwide buying accommodated
local tastes, a new team of merchants was formed in each
Macy’s market to gauge local buying habits. That way, the
company could reduce its overhead costs while ensuring
that Macy’s stores near water parks had extra swimsuits.
Companies such as DuPont, International Paper,
and U.S. Steel, which invest heavily in capital
equipment, or Amazon.com and Yahoo!, which invest
large amounts in software, have high overhead costs.
As the Macy’s example suggests, understanding the behavior of
overhead costs, planning for them, performing variance analysis, and
acting appropriately on the results are critical for a company.
In this chapter, we will examine how flexible budgets and variance
analysis can help managers plan and control overhead costs.
Chapter 7 emphasized the direct-cost categories of direct materials
and direct manufacturing labor. In this chapter, we focus on the
indirect-cost categories of variable manufacturing overhead and fixed
manufacturing overhead. Finally, we explain why managers should be
careful when interpreting variances based on overhead-cost concepts
developed primarily for financial reporting purposes.
Planning of Variable and Fixed Overhead Costs
We’ll use the Webb Company example again to illustrate the planning and control of variable
and fixed overhead costs. Recall that Webb manufactures jackets that are sold to distributors
who in turn sell to independent clothing stores and retail chains. For simplicity,
we assume Webb’s only costs are manufacturing costs. For ease of exposition, we use the
term overhead costs instead of manufacturing overhead costs. Variable (manufacturing)
overhead costs for Webb include energy, machine maintenance, engineering support, and
indirect materials. Fixed (manufacturing) overhead costs include plant leasing costs,
depreciation on plant equipment, and the salaries of the plant managers.
Learning
Objective 1
Explain the similarities
and differences in
planning variable
overhead costs and
fixed overhead costs
. . . for both, plan only
essential activities and
be efficient; fixed
overhead costs are
usually determined well
before the budget
period begins