1 Brenda Mallouk Overhead Variance Analysis Management Accounting One

1Brenda Mallouk

Overhead Variance Analysis

Management Accounting One

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• Compare to original plans

• Pinpoint discrepancies

• Take corrective action

Advantage of Identification of Variances

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Analyzing Overhead Variances

Split mixed costs into their fixed

Establish a fixed overhead rate anda variable overhead rate

and variable components

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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

Overhead Volume Variance

(combines the spending and efficiency overhead variances)

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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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Fixed Overhead Volume Variance This is the difference between the budgetedfixed overhead at 100% of normal capacityand the standard fixed overhead for the actualproduction achieved during the period.

Budgeted Fixed O/H - Standard Fixed O/H for Production Attained


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Three Way Variance Analysis

Variable Overhead Spending Variance


Variable Overhead Efficiency Variance

subdivides the budget variance into variable spending and efficiency variances

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Indicates the difference between actual variableoverhead costs and variable overhead costsallowed for the actual hours

Three Way Analysis

Variable Overhead Spending Variance --

Formula:

Total Actual Variable Overhead Costs - (Actual Hours x Standard Variable Overhead Rate)

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Three Way Analysis

Indicates the difference between the standardvariable overhead cost for actual hours and thestandard variable overhead cost for the allowed hours for the production attained.

Variable Overhead Efficiency Variance --

Formula:

(Actual Hours x Standard Variable Overhead Rate) - (SHA x SVR)

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Three Way Analysis


Same as two way variance analysis

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Four Way Variance Analysis


Fixed Overhead Volume Variance


Fixed Overhead Budget Variance *

* (Indicates the difference between actual and budgeted fixed factory overhead)

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(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

Total Actual Variable Overhead Costs - (Actual Hoursx Standard Variable Overhead Rate)

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(AH x SVOR) - (SHA x SVOR)

(Actual Hours x Std. Variable Rate) - Budgeted VariableOverhead for Production Attained


Flexible Budget - Standard Fixed O/H for Actual Production

Budgeted Fixed O/H Cost - (SHA x SFOR)

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Forester Creations Ltd. has the following budgetedstandard costs for a quarterly production volume of 2,500 units.

Budgeted Cost -- An Example

Direct materials (5 kilos @ $2.00) $10.00Direct labour (3 hours @ $5.00) 15.00Factory overhead Variable (3 labour hours @ $2.00) 6.00 Fixed (3 labour hours @ $4.00)* 12.00Total standard cost $43.00

* based on budget of $30,000 for 2,500 units which require 3 hours per unit

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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) 37,800Direct labour (8,900 hours @ $5.20) 46,280 Factory overhead: Variable 17,000 Fixed 30,000 Total manufacturing costs $ 131,080

Actual Cost -- An Example

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Flexible Budget Comparison

Actual Flexible VarianceBudget F or U

Volume 3,000 3,000Variable Costs:Direct Materials $37,800 $30,000 $7,800 UDirect Labour 46,280 45,000 1,280 UVar. Factory Overhead 17,000 18,000 1,000 FFixed Factory Overhead 30,000 30,000 0 Total $131,080 $123,000 $8,080 U

An Example

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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 = Actual Quantity of materials used

SP = Standard Unit Price of materials

SQA = Standard Quantity of materialsallowed for units manufactured

AP = Actual Unit Price of materials used

AQP = Actual Material Purchased

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Material Variances

Actual Cost - Actual Quantity at Standard Cost

(AQP x AP) - (AQP x SP)

(20,000 x $2.10) - (20,000 x $2.00)

$2,000 U

Material Purchase Price Variance

isolate variance at time of purchase

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Material Variances

Actual Cost - Actual Quantity at Standard Cost

(AQu x AP) - (AQu x SP)

(18,000 x $2.10) - (18,000 x $2.00)

$1,800 U

Material Usage Price Variance

isolate variance at time of use

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Material Variances

Actual Quantity at - Flexible Budget Standard Cost

(AQu x SP) - (SQA x SP)

(18,000 x $2.00) - (15,000 x $2.00)

$6,000 U

Material Quantity Variance

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AH = Actual direct labour hours

SR = Standard rate of pay per directlabour hour

SHA = Standard direct labour hours allowedfor the units manufactured

AR = Actual rate pay per direct labour rate

Labour Variances

TLV = Actual Cost - Flexible Budget = (AH x AR) - (SHA x SR)

Where --

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Labour Variances

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

Labour Rate (Price) Variance

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Labour Variances

Actual Hours at - Flexible Budget Standard Cost

(AH x SR) - (SHA x SR)

(8,900 x $5.00) - (9,000 x $5.00)

$500 F

Labour Efficiency Variance

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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 HoursAR = Actual RateSHA = Standard Hours Allowed for Actual Production

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Overhead Controllable (Budget) Variance

$17,000 - (9,000 x $2.00)

Actual Variable Overhead Cost - Flexible Variable Budget

Total Variable Overhead Costs - SHA x SVOR

= $1,000 F

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$30,000] - ($4 x 9,000)

Flexible Budget - Standard Fixed Overhead for Production Attained

Budgeted Fixed Overhead Cost - [(SHA x SFOR)

$6,000 F

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Three Way Overhead Analysis




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AH = Actual direct labour hours

SR = Standard variable rate per direct labour hour

SHA = Standard direct labour hours allowedfor the units manufactured

AR = Actual rate per direct labour rate

Three Way Overhead Variance

TVOV = Actual Variable O/H Cost - Flexible Budget = (AH x AR) - (SHA x SVOR)

Where --

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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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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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Same as the Two Variance Method

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Four Way Overhead Analysis


Actual Variable Overhead Cost - (AH x SVOR) = $800 F

Fixed Overhead Budget Varianceindicates the difference between actual and budgeted fixed overhead

Actual Fixed O/H Costs - Budgeted Fixed O/H Costs

$30,000 - $30,000 = $ 0

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Four Way Overhead Analysis


(AH x SVOR) - (SHA x SVOR) = $200 F


Flexible Budget - SFOR x Good OutputBudgeted Fixed O/H Cost - (SFOR x SHA) $30,000 - ($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 towork in process and finished goods and cost of goods sold if material.

1 not significant in amount

Documents

1 Brenda Mallouk Overhead Variance Analysis Management Accounting One