ACC2205 Management Accounting A - Variance Analysis and Management Control

Flexible Total Overhead Budget

• A flexible overhead budget shows overhead costs at various levels of activity.
• Formula:
  • The specific formula is not provided in this excerpt.

Overhead Application in a Standard Costing System

• Overhead application is the method of allocating overhead cost to products.
• It is recorded in the Work-in-Progress (WIP) inventory account.
• Overhead is applied to inventory using the standard overhead rate.
• Overhead is based on the standard quantity of input allowed, given actual output.

Calculating Overhead Cost Variances

• The flexible budget is used to calculate the overhead cost that should have been incurred given the actual level of activity.
• Four different overhead variances can be calculated to compare the actual overhead cost with the flexible budget.

Variable Overheads

• Consist of spending and efficiency variances.

Variable Overhead Spending Variance

• Difference between the actual variable overhead and the standard variable overhead rate multiplied by actual activity of input.

Variable Overhead Efficiency Variance

• Difference between the actual activity and the standard activity allowed, given the actual output multiplied by the standard variable overhead rate.
• Calculated as (applied variable overhead standard rate x actual input activity).

Fixed Overheads

• Consist of budget and volume variances.

Fixed Overhead Budget Variance

• Difference between actual fixed overhead and budgeted fixed overhead.
• $Actual Fixed Overhead - Budgeted Fixed Overhead$

Fixed Overhead Volume Variance

• Difference between budgeted fixed overhead and fixed overhead applied to production.
• $Budgeted Fixed Overhead - Applied Fixed Overhead$

Identifying Favorable vs. Unfavorable Variances

• Spending and efficiency variances consider overhead rate or input x output quantity for each indirect cost variance.

Variable Overhead Spending Variance Formula

• $(Actual Hours of Input \times Actual Output \times Actual Rate) - (Actual Hours of Input \times Actual Output \times Standard Variable Overhead Rate)$

Variable Overhead Efficiency Variance Formula

• $(Actual Hours of Input \times Actual Output \times Standard Rate) - (Standard Hours of Input \times Actual Output \times Standard Rate)$

Variable Overhead Spending Variance: Key Difference

• Focuses on Actual Rate (AR) - Standard Rate (SR).
  • If AR > SR, the variance is positive and unfavorable (spent too much).
  • If AR < SR, the variance is negative and favorable (spent less than expected).
  • Example:
    • AR = $10, SR = $8. 10 - 8 = $2. Positive, so spent $2 too much (unfavorable).
    • AR = $10, SR = $12. 10 - 12 = -$2. Negative, so spent $2 less than expected (favorable).

Variable Overhead Efficiency Variance

• $Actual Quantity of Input \times Actual Output \times Standard Rate - Standard Hours of Input \times Actual Output \times Standard Rate$
  • Example:
    • $AH = 3 \text{ hrs}, SH = 1.8 \text{ hrs}$. $3 - 1.8 = 1.2 \text{ hrs}$. Positive, used 1.2 hrs more than expected (unfavorable).
    • $AH = 1.5 \text{ hrs}, SH = 3 \text{ hrs}$. $1.5 - 3 = -1.5 \text{ hrs}$. Negative, used 1.5 hrs less than expected (favorable).

Example 1: Variable Overhead Spending and Efficiency Variances

• Given Data:
  • Actual Hours (AH): 50,000 hours
  • Actual Rate (AVR): 6.40 per hour
  • Standard Rate (SVR): 6.00 per hour
  • Standard Hours Allowed (SH): 40,000 hours
• Calculations:
  • Actual variable cost: $50,000 \text{ hours} \times$6.40 \text{ per hour} = $320,000$
  • Flexible budget (based on actual direct labor hours): $50,000 \text{ hours} \times$6.00 \text{ per hour} = $300,000$
  • Flexible budget applied (based on standard direct labor hours allowed): $40,000 \text{ hours} \times$6.00 \text{ per hour} = $240,000$
• Variances:
  • Variable overhead spending variance: 320,000 - $300,000 = $20,000 Unfavorable
  • Variable overhead efficiency variance: 300,000 - $240,000 = $60,000 Unfavorable (underapplied)
• Actual Variable Overhead Rate Calculation:
  • $AVR =$320,000 / 50,000 \text{ hours} = $6.40 \text{ per hour}$

Example 2: Fixed Overhead Budget and Volume Variances

• Given Data:
  • Actual Fixed Overhead: 97,000
  • Budgeted Fixed Overhead: 100,000
  • Fixed Overhead Applied to Work in Process: 80,000
  • Standard Hours Allowed for Actual Output: 40,000 hours
  • Fixed Overhead Rate: 2.00 per hour
• Calculations:
  • Fixed Overhead Rate Calculation (given): 100,000 / (25,000 \text{ units} \times 2 \text{ hours per unit}) = $2.00 per hour
• Variances:
  • Fixed Overhead Budget Variance: 97,000 - $100,000 = -$3,000 Favorable
  • Fixed Overhead Volume Variance: 100,000 - $80,000 = $20,000 Unfavorable (underapplied)