Content area
Full Text
Management accountants' "overhead control" analysis has historically been a contradiction in terms. We have understood for some time that traditional overhead analysis gave us no really useful control information. Recent research on cost drivers for activity based product cost determination has given us a new perspective on overhead control.(1) In addition to overhead pools being too aggregated and allocation of overhead being based on a single, probably irrelevant base, variance formulas are also being misapplied. As a result, accounting performance reports may signal that no deeper investigation is needed when one is warranted or indicate that consumption is a problem when price changes are to blame, etc.
The objective of this article is to assist in changing accounting practice, management education, and the professional examinations away from traditional overhead analysis and toward cost driver based flexible budgets. At best, any time being spent on the usual meaningless reports is a waste and should be avoided. Additionally, the credibility of other accounting reports may suffer by being tarred with the same brush. At worst, any managers relying on current reports may be misled into costly, incorrect decisions.
THE PROBLEM
Garrison's Managerial Accounting, a leading text in the field, contains the following typical treatment. "The variable portion of manufacturing overhead can be analyzed and controlled using the same basic variance formulas that are used in analyzing direct materials and direct labor."(2) As is common, the results are labeled Spending Variance and Efficiency Variance. Garrison then notes, "Most firms consider the overhead spending variance to be highly useful...,feeling that the information it yields is sufficient for overhead cost control."(3) Garrison does warn, as do most other authors, that "...efficiency variance is a misnomer" as efficiencies are "...not in the use of overhead but rather in the use of the base itself."(4) The efficiency variance simply tells the overhead effect of the difference between planned labor use and actual labor use. In a similar vein, Horngren and Foster say, "The spending variance is really a composite of price and other factors....For this reason, most practitioners used the term 'spending' variance rather than merely 'price variance.'"(6) As will be demonstrated later with a case problem, faith in the spending variance to provide useful information can be very misplaced. If it...