Session 15 – Discussion Topics
PGP-27: Term II
MANAGEMENT
ACCOUNTING Variable overhead variances
Fixed overhead variances
COST AND
If you are intelligent, it does not benefit the society a bit until you turn equally benevolent!
1
Variable Overhead Variances:
Flexible Budget Analysis
Variable overhead flexible-budget variance measures the difference between
actual variable overhead costs incurred and flexible-budget variable overhead
amounts.
VARIABLE OVERHEAD FLEXIBLE BUDGET VARIANCE =
Actual Costs Incurred – Flexible-budget amount
This variance can be further broken down into the:
Variable Overhead Efficiency Variance and the
Variable Overhead Spending Variance
Variable Overhead Variances:
Efficiency Variance
Variable overhead efficiency variance is the difference between the actual
quantity of the cost-allocation base used and budgeted quantity of the cost-
allocation base that should have been used to produce the actual output,
multiplied by the budgeted variable overhead cost per unit of the cost-allocation
base.
VARIABLE OVERHEAD EFFICIENCY VARIANCE =
{Actual quantity of variable overhead cost-allocation base used for actual output
–
Budgeted quantity of variable overhead cost-allocation base allowed for actual
output} X
Budgeted variable overhead cost per unit of cost-allocation base
Variable Overhead Cost Variances:
Spending Variance
Variable overhead spending variance is the difference between the actual
variable overhead cost per unit of the cost-allocation base and the budgeted
variable overhead cost per unit of the cost-allocation base, multiplied by the
actual quantity of variable overhead cost-allocation base used.
VARIABLE OVERHEAD SPENDING VARIANCE =
{Actual variable overhead cost per unit of cost-allocation base –
Budgeted variable overhead cost per unit of cost-allocation base} X
Actual quantity of variable overhead cost-allocation base used
Variable Overhead Variance Analysis:
An Illustration
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Fixed Overhead Variances:
Flexible-Budget Variance and Spending Variance
Fixed overhead flexible-budget variance is the difference between actual fixed
overhead costs and fixed overhead costs in the flexible budget.
The fixed overhead spending variance is the same variance as the Fixed
Overhead Flexible-Budget Variance.
The formula is: Actual Costs Incurred – Flexible Budget Amount
Fixed Overhead Variances:
Production-Volume Variance
The production-volume variance arises only for fixed costs. It is the difference
between the budgeted fixed overhead and the fixed overhead allocated on the
basis of actual output produced.
This variance is also know as the denominator-level variance.
The formula is:
Budgeted Fixed Overhead – Fixed Overhead allocated for actual output units
produced
Production Volume Variance:
A careful interpretation
Interpretation of this variance is difficult due to the nature of the costs involved
and how they are budgeted.
Fixed costs are by definition somewhat inflexible. While market conditions may
cause production to flex up or down, the associated fixed costs remain the
same.
Fixed costs may be set years in advance, and may be difficult to change quickly.
Contradiction: Despite this, examination of the fixed overhead budget formulae
reveals that it is budgeted similar to a variable cost.
Fixed Overhead Variance Analysis:
An illustration
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4-Variance Analysis
4-VARIANCE SPENDING EFFICIENCY PRODUCTION-
ANALYSIS VARIANCE VARIANCE VOLUME VARIANCE
VARIABLE YES YES NEVER A VARIANCE
OVERHEAD
FIXED OVERHEAD YES NEVER A YES
VARIANCE
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Application Exercises:
1. Really Great Corporation manufactures industrial-sized landscaping trailers and uses budgeted
machine-hours to allocate variable manufacturing overhead. The following information pertains to
the company's manufacturing overhead data:
Budgeted output units 40,000 units
Budgeted machine-hours 10,000 hours
Budgeted variable manufacturing overhead costs for 40,000 units $310,000
Actual output units produced 36,500 units
Actual machine-hours used 14,600 hours
Actual variable manufacturing overhead costs $350,400
Compute variable manufacturing overhead variances.
AE contd…
2. Castleton Corporation manufactured 41,000 units during March. The following fixed overhead
data relates to March:
Actual Static Budget
Production 41,000 units 39,000 units
Machine-hours 6,020 hours 5,850 hours
Fixed overhead costs for March $125,500 $117,000
Compute fixed overhead variances.
