Cost Accounting (14th Edition)

Webb’s managers discovered that one reason the machines operated below budgeted
efficiency levels in April 2011 was insufficient maintenance performed in the prior two
months. A former plant manager delayed maintenance in a presumed attempt to meet
monthly budget cost targets. As we discussed in Chapter 6, managers should not be
focused on meeting short-run budget targets if they are likely to result in harmful long-run
consequences. Webb is now strengthening its internal maintenance procedures so that
failure to do monthly maintenance as needed will raise a “red flag” that must be immediately
explained to management. Another reason for actual machine-hours exceeding budgeted
machine-hours was the use of underskilled workers. As a result, Webb is initiating
steps to improve hiring and training practices.
Variable Overhead Spending Variance
The variable overhead spending variance is the difference between actual variable overhead
cost per unit of the cost-allocation base and budgeted variable overhead cost per
unit of the cost-allocation base, multiplied by the actual quantity of variable overhead
cost-allocation base used for actual output.
VARIABLE OVERHEAD COST VARIANCES 269
Variable
overhead
spending
variance
Actual variable
= § overhead cost per unit
of cost-allocation base
Budgeted variable
- overhead cost per unit ¥ *
of cost-allocation base
Actual quantity of
variable overhead
cost-allocation base
used for actual output
= ($29 per machine-hour - $30 per machine-hour) * 4,500 machine-hours
= (- $1 per machine-hour) * 4,500 machine-hours
= $4,500 F
Since Webb operated in April 2011 with a lower-than-budgeted variable overhead cost
per machine-hour, there is a favorable variable overhead spending variance. Columns 1
and 2 in Exhibit 8-1 depict this variance.
To understand the favorable variable overhead spending variance and its implications,
Webb’s managers need to recognize why actual variable overhead cost per unit of
the cost-allocation base ($29 per machine-hour) is lower than the budgeted variable overhead
cost per unit of the cost-allocation base ($30 per machine-hour). Overall, Webb
used 4,500 machine-hours, which is 12.5% greater than the flexible-budget amount of
4,000 machine hours. However, actual variable overhead costs of $130,500 are only
8.75% greater than the flexible-budget amount of $120,000. Thus, relative to the flexible
budget, the percentage increase in actual variable overhead costs is less than the percentage
increase in machine-hours. Consequently, actual variable overhead cost per machinehour
is lower than the budgeted amount, resulting in a favorable variable overhead
spending variance.
Recall that variable overhead costs include costs of energy, machine maintenance, indirect
materials, and indirect labor. Two possible reasons why the percentage increase in actual
variable overhead costs is less than the percentage increase in machine-hours are as follows:
1. Actual prices of individual inputs included in variable overhead costs, such as the price
of energy, indirect materials, or indirect labor, are lower than budgeted prices of these
inputs. For example, the actual price of electricity may only be $0.09 per kilowatthour,
compared with a price of $0.10 per kilowatt-hour in the flexible budget.
2. Relative to the flexible budget, the percentage increase in the actual usage of individual
items in the variable overhead-cost pool is less than the percentage increase in machinehours.
Compared with the flexible-budget amount of 30,000 kilowatt-hours, suppose
actual energy used is 32,400 kilowatt-hours, or 8% higher. The fact that this is a
smaller percentage increase than the 12.5% increase in machine-hours (4,500 actual
machine-hours versus a flexible budget of 4,000 machine hours) will lead to a favorable
variable overhead spending variance. The favorable spending variance can be partially
or completely traced to the efficient use of energy and other variable overhead items.