Transcript Management Accounting One Overhead Variance Analysis Brenda Mallouk Advantage of Identification of Variances • Compare to original plans • Pinpoint discrepancies • Take corrective action Brenda Mallouk.

Management Accounting One
Overhead
Variance Analysis
Brenda Mallouk
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Advantage of Identification of Variances
• Compare to original plans
• Pinpoint discrepancies
• Take corrective action
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Analyzing Overhead Variances
 Split mixed costs into their fixed
and variable components
 Establish a fixed overhead rate and
a variable overhead rate
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Overhead Variances Can Result From
Actual Overhead > or < Budget
Actual Production > or < 100% of Normal Capacity
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Two Way Variance Analysis
Overhead Budget (Controllable) Variance
(combines the spending and efficiency overhead variances)
Overhead Volume Variance
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Two Way Variance Analysis
Budget (Controllable) Overhead Variance
Difference between actual variable overhead
incurred and the budgeted variable overhead
for the actual production (the level of good
output achieved)
Actual Variable Overhead - Budgeted
Variable Overhead for Good Production
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Two Way Variance Analysis
Fixed Overhead Volume Variance
This is the difference between the budgeted
fixed overhead at 100% of normal capacity
and the standard fixed overhead for the actual
production achieved during the period.
Budgeted Fixed O/H - Standard Fixed O/H for
Production Attained
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Three Way Variance Analysis
subdivides the budget variance into variable spending
and efficiency variances
Variable Overhead Spending Variance
Variable Overhead Efficiency Variance
Overhead Volume Variance
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Three Way Analysis
Variable Overhead Spending Variance -Indicates the difference between actual variable
overhead costs and variable overhead costs
allowed for the actual hours
Formula:
Total Actual Variable Overhead Costs (Actual Hours x Standard Variable Overhead Rate)
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Three Way Analysis
Variable Overhead Efficiency Variance -Indicates the difference between the standard
variable overhead cost for actual hours and the
standard variable overhead cost for the allowed
hours for the production attained.
Formula:
(Actual Hours x Standard Variable Overhead Rate) (SHA x SVR)
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Three Way Analysis
Overhead Volume Variance
Same as two way variance analysis
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Four Way Variance Analysis
Variable Overhead Spending Variance
Fixed Overhead Budget Variance *
Variable Overhead Efficiency Variance
Fixed Overhead Volume Variance
* (Indicates the difference between actual and budgeted
fixed factory overhead)
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Four Way Variance Analysis
Variable Overhead Spending Variance
Total Actual Variable Overhead Costs - (Actual Hours
x Standard Variable Overhead Rate)
(AH x AR) - (AH x SR)
Fixed Overhead Budget Variance
indicates the difference between actual and
budgeted fixed overhead
Actual Fixed O/H Costs - Budgeted Fixed O/H Costs
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Four Way Variance Analysis
Variable Overhead Efficiency Variance
(Actual Hours x Std. Variable Rate) - Budgeted Variable
Overhead for Production Attained
(AH x SVOR) - (SHA x SVOR)
Overhead Volume Variance
Flexible Budget
-
Budgeted Fixed O/H Cost Brenda Mallouk
Standard Fixed O/H for
Actual Production
(SHA x SFOR)
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Budgeted Cost -- An Example
Forester Creations Ltd. has the following budgeted
standard costs for a quarterly production volume of
2,500 units.
Direct materials (5 kilos @ $2.00)
Direct labour (3 hours @ $5.00)
Factory overhead
Variable (3 labour hours @ $2.00)
Fixed (3 labour hours @ $4.00)*
Total standard cost
$10.00
15.00
6.00
12.00
$43.00
* based on budget of $30,000 for 2,500 units which require
3 hours per unit
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Actual Cost -- An Example
Forester Fashions purchased 20,000 kilograms in the first
quarter ending June 30 and incurred the following production
costs for 3,000 units.
Production Costs:
Direct materials (18,000 kilograms @ $2.10)
Direct labour (8,900 hours @ $5.20)
Factory overhead:
Variable
Fixed
Total manufacturing costs
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37,800
46,280
17,000
30,000
$ 131,080
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An Example
Flexible Budget Comparison
Actual
Volume
3,000
Variable Costs:
Direct Materials
$37,800
Direct Labour
46,280
Var. Factory Overhead
17,000
Fixed Factory Overhead 30,000
Total
$131,080
Brenda Mallouk
Flexible
Budget
Variance
F or U
3,000
$30,000
45,000
18,000
30,000
$123,000
$7,800 U
1,280 U
1,000 F
0
$8,080 U
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Material Variances
TMV =
=
=
Actual Costs - Flexible Budget Costs
(AQu x AP)
(SQA x SP)
(18,000 x $2.10) (15,000 x $2)
$7,800 U
AQu
AP
SQA
=
=
=
Actual Quantity of materials used
Actual Unit Price of materials used
Standard Quantity of materials
allowed for units manufactured
SP
=
Standard Unit Price of materials
AQP
=
Actual Material Purchased
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Material Variances
Material Purchase Price Variance
isolate variance at time of purchase
Actual Cost
-
(AQP x AP)
-
(20,000 x $2.10) -
Actual Quantity at
Standard Cost
(AQP x SP)
(20,000 x $2.00)
$2,000 U
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Material Variances
Material Usage Price Variance
isolate variance at time of use
Actual Cost
-
(AQu x AP)
-
(18,000 x $2.10) -
Actual Quantity at
Standard Cost
(AQu x SP)
(18,000 x $2.00)
$1,800 U
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Material Variances
Material Quantity Variance
Actual Quantity at
Standard Cost
(AQu x SP)
-
Flexible Budget
-
(SQA x SP)
(18,000 x $2.00) -
(15,000 x $2.00)
$6,000 U
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Labour Variances
TLV
= Actual Cost - Flexible Budget
= (AH x AR) - (SHA x SR)
Where -AH
=
Actual direct labour hours
AR
=
Actual rate pay per direct labour rate
SHA
=
Standard direct labour hours allowed
for the units manufactured
SR
=
Standard rate of pay per direct
labour hour
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Labour Variances
Labour Rate (Price) Variance
Actual Cost
-
Actual Hours at
Standard Cost
(AH x AR)
-
(AH x SR)
(8,900 x $5.20) -
(8,900 x $5.00)
$1,780 U
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Labour Variances
Labour Efficiency Variance
Actual Hours at
Standard Cost
-
Flexible Budget
(AH x SR)
-
(SHA x SR)
(8,900 x $5.00)
-
(9,000 x $5.00)
$500 F
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Two Way Overhead Analysis
TOV
= Actual Variable Overhead Cost - Budgeted
Variable Overhead for Actual Production
= (AH x AR) - [(SHA x SVOR)
Where:
AH = Actual Hours
AR = Actual Rate
SHA = Standard Hours Allowed for Actual Production
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Two Way Overhead Analysis
Overhead Controllable (Budget) Variance
Actual Variable Overhead Cost - Flexible Variable Budget
Total Variable Overhead Costs - SHA x SVOR
$17,000
- (9,000 x $2.00)
= $1,000 F
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Two Way Overhead Analysis
Overhead Volume Variance
Flexible Budget
-
Standard Fixed Overhead
for Production Attained
Budgeted Fixed Overhead Cost -
[(SHA x SFOR)
$30,000] - ($4 x 9,000)
$6,000 F
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Three Way Overhead Analysis
Variable Overhead Spending Variance
Variable Overhead Efficiency Variance
Overhead Volume Variance
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Three Way Overhead Variance
TVOV
= Actual Variable O/H Cost =
(AH x AR)
-
Flexible Budget
(SHA x SVOR)
Where -AH
=
Actual direct labour hours
AR
=
Actual rate per direct labour rate
SHA
=
Standard direct labour hours allowed
for the units manufactured
SR
=
Standard variable rate per direct
labour hour
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Three Way Overhead Variance
Variable Overhead Spending Variance
Total Actual Variable Overhead Costs (Actual Hours x Standard Variable Overhead Rate)
$17,000 - [(8,900 x $2.00)
= $800 F
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Three Way Overhead Variance
Overhead Efficiency Variance
(Actual Hours x Standard Variable Overhead Rate) (SHA x SVR)
(8,900 x $2.00) - (9,000 x $2.00)
= $200 F
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Three Way Overhead Variance
Overhead Volume Variance
Same as the Two Variance Method
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Four Way Overhead Analysis
Variable Overhead Spending Variance
Actual Variable Overhead Cost - (AH x SVOR) = $800 F
Fixed Overhead Budget Variance
indicates the difference between actual and
budgeted fixed overhead
Actual Fixed O/H Costs - Budgeted Fixed O/H Costs
$30,000
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-
$30,000 =
$0
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Four Way Overhead Analysis
Variable Overhead Efficiency Variance
(AH x SVOR) - (SHA x SVOR) = $200 F
Overhead Volume Variance
Flexible Budget
Budgeted Fixed O/H Cost $30,000
-
SFOR x Good Output
(SFOR x SHA)
($4.00 x 9,000)
$6,000 F
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Disposition of Variances
Material Variance
Closed to cost of goods sold if not material,1 or to all
inventories and cost of goods sold if material.
Labour Variance and Overhead Variances
Closed to cost of goods sold if not material, or to
work in process and finished goods and cost of
goods sold if material.
1
not significant in amount
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