Overhead Rates and Overhead Analysis in a Standard Costing System Appendix 8A Learning Objective 87 Compute and interpret the fixed overhead budget and volume variances Budget variance Fixed Overhead Budget Variance ID: 618890
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Slide1
Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System
Appendix 8ASlide2
Learning Objective 8-7
Compute and interpret the fixed overhead budget and volume variances.Slide3
Budget variance
Fixed Overhead Budget Variance
Budget
variance
Budgeted
fixed
overhead
Actual
fixed
overhead
=
–
Actual
Fixed
Overhead
Fixed
Overhead
Applied
BudgetedFixedOverheadSlide4
Volume
variance
Fixed Overhead Volume Variance
Volume
variance
Fixed
overhead
applied to
work in process
Budgeted
fixed
overhead
=
–
Actual
Fixed
Overhead
Fixed
OverheadApplied
BudgetedFixedOverheadSlide5
FPOHR = Fixed portion of the predetermined overhead rate DH = Denominator hours
SH = Standard hours allowed for actual output
SH × FPOHR
DH
× FPOHR
Fixed Overhead Volume Variance
Volume variance
FPOHR
× (DH – SH)
=
Actual
Fixed
Overhead
Fixed
Overhead
Applied
Budgeted
Fixed
Overhead
Volume
varianceSlide6
Computing Fixed Overhead VariancesSlide7
Computing Fixed Overhead VariancesSlide8
Predetermined Overhead Rates
Predetermined
overhead rate
Estimated total manufacturing overhead cost
Estimated total amount of the allocation base
=
Predetermined
overhead rate
$360,000
90,000 Machine-hours
=
Predetermined
overhead rate
= $4.00 per machine-hourSlide9
Predetermined Overhead Rates
Variable component of the
predetermined overhead rate
$90,000
90,000 Machine-hours
=
Variable component of the
predetermined overhead rate
= $1.00 per machine-hour
Fixed component of the
predetermined overhead rate
$270,000
90,000 Machine-hours
=
Fixed component of the
predetermined overhead rate
= $3.00 per machine-hourSlide10
Applying Manufacturing Overhead
Overhead
applied
Predetermined
overhead rate
Standard hours allowed
for the actual output
=
×
Overhead
applied
$4.00 per
machine-hour
84,000 machine-hours
=
×
Overhead
applied
$336,000
=Slide11
Computing the Budget Variance
Budget
variance
Budgeted
fixed
overhead
Actual
fixedoverhead
=
–
Budget
variance
=
$280,000
– $270,000Budgetvariance
=
$10,000 UnfavorableSlide12
Computing the Volume Variance
Volume
variance
Fixed
overhead
applied to
work in process
Budgetedfixedoverhead
=
–
Volume
variance
=
$18,000 Unfavorable
Volumevariance
=
$270,000 –
$3.00 permachine-hour
(
×
$84,000
machine-hours
)Slide13
Computing the Volume Variance
FPOHR = Fixed portion of the predetermined overhead rate
DH = Denominator hours
SH = Standard hours allowed for actual output
Volume variance
FPOHR
× (DH – SH)
=
Volume
variance
=
$3.00 per
machine-hour
(
×
90,000
mach-hours
–
84,000
mach-hours
)
Volume
variance
=
18,000 Unfavorable
Because the standard hours allowed is
less than
the denominator volume, it presumably signals inefficient usage of facilities. Therefore, the variance is labeled as unfavorable.Slide14
A Pictorial View of the Variances
Fixed Overhead
Applied to
Work in Process
Actual
Fixed
Overhead
Budgeted
Fixed
Overhead
252,000
270,000
280,000
Total variance, $28,000 unfavorable
Budget variance,
$10,000 unfavorable
Volume variance,
$18,000 unfavorableSlide15
Fixed Overhead Variances –
A Graphic Approach
Let’s look at a graph showing fixed overhead variances. We will use ColaCo’s numbers from the previous example. Slide16
Graphic Analysis of Fixed
Overhead Variances
Machine-hours (000)
Budget
$270,000
90
Denominator
hours
0
0
Fixed overhead applied at
$3.00 per standard hourSlide17
Graphic Analysis of FixedOverhead Variances
Actual
$280,000
Machine-hours (000)
Budget
$270,000
90
Denominator
hours
0
0
Fixed overhead applied at
$3.00 per standard hour
Budget Variance 10,000 U
{Slide18
Applied
$252,000
Machine-hours (000)
Budget
$270,000
Graphic Analysis of Fixed
Overhead Variances
90
84
0
0
Standard
hours
Fixed overhead applied at
$3.00 per standard hour
Denominator
hours
Budget Variance 10,000 U
Volume Variance 18,000 U
{
{
Actual
$280,000Slide19
Reconciling Overhead Variances and Underapplied or Overapplied Overhead
In a standard
cost system:
Unfavorable
variances are equivalent
to underapplied overhead.
Favorable
variances are equivalent
to overapplied overhead.
The sum of the overhead variances
equals the under- or overapplied
overhead cost for the period.Slide20
Reconciling Overhead Variances and Underapplied or Overapplied OverheadSlide21
Computing the Variable Overhead Variances
Variable manufacturing overhead rate variance
VMRV = (AH × AR) – (AH × SR)
= $100,000 – (88,000 hours × $1.00 per hour)
= $12,000 unfavorableSlide22
Computing the Variable Overhead Variances
Variable manufacturing overhead efficiency variance
VMEV = (AH × SR) – (SH × SR)
= $88,000 – (84,000 hours × $1.00 per hour)
= $4,000 unfavorableSlide23
Computing the Sum of All VariancesSlide24
End of Chapter 8A