Chapter 3 Predetermined Overhead Rates, Flexible Budgets, and Absorption

2. Learning Objectives (1 of 3) Explain why and how overhead costs are allocated to products and services Describe what causes underapplied or overapplied overhead and how is it treated at the end of the period

3. Learning Objectives (2 of 3) Explain how different capacity measures affect predetermined overhead rates Explain how managers use flexible budgets to set predetermined overhead rates

11. Applying Variable Overhead Actual activity level times Predetermined overhead rate equals overhead applied

17. Disposing of Overhead Differences If overhead is underapplied Cost of Goods Sold increases Income decreases If overhead is overapplied Cost of Goods Sold decreases Income increases

26. Mixed Costs To determine variable and fixed predetermined overhead rates, separate mixed costs into variable and fixed components

31. Flexible Budgets Separate overhead costs into fixed and variable components in order to estimate the amount of overhead at various levels of the denominator activity

32. Flexible Budget Shows manufacturing overhead costs and cost behavior Separates costs into fixed and variable elements Provides budgeted costs at various activity levels Shows impact of a change in the denominator level of activity

33. Preparing a Flexible Budget Separate mixed costs into variable and fixed elements Determine the a + bX cost formula Select several potential levels of activity within the relevant range Determine total cost expected at each of the activity levels

34. Flexible Budgets

35. Income Statement Absorption Costing Sales Less: Cost of Goods Sold Gross Profit Less: Operating Expenses Net Income

36. Variable Costing or Contribution Margin Income Statement Sales Less: Variable Cost of Goods Sold Product Contribution Margin Less: Variable Operating Expenses Contribution Margin Less: Fixed Mfg. Overhead Less: Fixed Operating Expenses Net Income

37. Questions How does underapplied overhead affect cost of goods sold and net income? What is the difference between absorption and variable costing?