Overhead Variances and Management Control: II

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Overhead Variancesand Management Control II

• Chapter 8

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Overview Overhead Variances

• VOH vs. FOH
• Features of a standard-cost system
• Calculation of VOH variances
• VOH Efficiency variance
• Calculate FOH variances
• Production-volume variancemeaning
• 4, 3, 2, 1 OH variance analysis
• J.E.s for MOH varianceswhich are favorable?
• Balanced Scorecard

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Standard Cost System

• Simple recording system
• Cost to run system is relatively low.
• All output units are costed at standardno need
  to keep track of the actual costs/unit or the use
  of allocation bases.

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VOH Variances useful approach to calculate

• Actual no name Flexible Budget

Actual VOH
AQ Alloc.base used X BR/unit Alloc.base
For actual output BQ Alloc.base X BR/unit
Alloc.base
For budget output BQ Alloc.base X BR/unit
Alloc.base
----------------------------SBV------------------
-------------------- ----------------FBV-------
---------------------------SVV--------- ----Sp
ending V-----------Efficiency V------
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Variable OverheadCost Variances in-class
example
Larrys Machine Shop uses machine hours as the
base to allocate VMOH. Larry budgeted output of
10,000 units using 7,500 machine hours. Budgeted
VMOH cost per unit of output is 15. Actual
output was 12,000 units, actual machine hours
used were 11,000 hours, and actual VOH rate was
16 per unit of output.
Calculate the Static Budget, Sales-volume,
Flex., Spending (price), and Efficiency (usage)
variances.
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VOH Efficiency Variance
The efficiency variance that we calculated for
direct inputs relates to how efficient we used
the direct input (materials, labor).
The VOH efficiency variance addresses how
efficient the cost allocation base was used.
If you want to calculate the spending or usage
variance of any specific item in the cost pool,
then you have to take it out of the OH pool and
trace it directly.
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FOH Variances calculation

• Actual Budget Allocated

Actual FOH
Lump sum
For actual output BQ of Alloc.base X BR / unit
Alloc.base
-------- Spending --------------- Production
Volume ------- ------------- Over or
under-allocated FMOH -------------
Standard costing is assumed.
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Fixed Overhead Variances

• There is no
• flexing of FMOH.
• sales-volume variance
• efficiency variance
• The spending variance is also called
• Static-budget variance
• Flexible-budget variance

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Flexible-Budget Variance
Actual Costs Incurred 300,000
Flexible Budget Budgeted Fixed Overhead 286,000

14,000 U Fixed overhead spending variance (Fixed
overhead flexible-budget variance)
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Production-Volume Variance
Flexible Budget Budgeted Fixed Overhead 286,000
Fixed Overhead Allocated Using Budgeted Input
Allowed for Actual Output Units Produced 220,000

66,000 U Production-volume variance
10,000 2.00 11 220,000
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Fixed Overhead Variances
Fixed overhead variance 80,000 U
P. Volume variance 66,000 U
Spending variance 14,000 U
FOH was under-allocated by 80,000
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Production-Volume Variance Interpretation
Management may have maintained some extra
capacity.
Production volume variance focuses only on costs.
This variance results from unitizing fixed
costs.
Not much economic meaning to the
production-volume variance.
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Interpreting the Production-Volume Variance
Had Pasadena manufactured 13,000 suits instead of
10,000, allocated fixed overhead would have been
286,000 (13,000 2.00 11).
No production-volume variance would have occurred.
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4-, 3-, 2-, and 1-MOH variance analysis.
It is an issue of the level of aggregation
desired.
Most organizations use 3- or 2-variance analysis
for MOH.
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Integrated OH Analysis
Variances Spending Efficiency Production-volume
4-variance analysis presents the most
detail VMOH 4,300 U 220 F Never FMOH 1,340
F Never 700 F
3-variance analysis Total MOH 2,960 U 220
F 700 F
2-variance analysis Flexible-budget Pro
duction-volume Total MOH 2,740 U
700 F
1-variance analysis Total OH
Variance Total MOH 2,040 U
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Journal Entries for Overhead Costs and Variances

• VMOH-allocated 240,000
• VMOH-efficiency Var. 18,000
• VMOH-control 244,775
• VMOH-spending Var. 13,225
• (To isolate variances for the accounting period)
• Which are favorable (debit or credit entries)?

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Financial and Nonfinancial PerformanceBalanced
Score Card
Overhead variances are examples of financial
performance measures.
What are examples of nonfinancial measures?
Actual labor time, relative to budgeted time
Actual indirect materials usage per labor-hour,
relative to budgeted indirect materials usage