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Appendix 10A

Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System. Appendix 10A. Learning Objective 4. (Appendix 10A) Compute and interpret the fixed overhead volume and budget variances. Fixed Overhead Volume Variance. Fixed Overhead Applied. Budgeted Fixed Overhead.

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Appendix 10A

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  1. Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System Appendix 10A

  2. Learning Objective 4 (Appendix 10A) Compute and interpret the fixed overhead volume and budget variances.

  3. Fixed Overhead Volume Variance FixedOverheadApplied BudgetedFixedOverhead ActualFixedOverhead Volumevariance Fixedoverheadapplied towork in process Budgetedfixedoverhead Volumevariance = –

  4. Fixed Overhead Volume Variance FixedOverheadApplied BudgetedFixedOverhead ActualFixedOverhead DH × FR SH × FR Volumevariance Volume variance = FPOHR × (DH – SH) FPOHR = Fixed portion of the predetermined overhead rate DH = Denominator hours SH = Standard hours allowed for actual output

  5. Fixed Overhead Budget Variance FixedOverheadApplied BudgetedFixedOverhead ActualFixedOverhead Budget variance Actualfixedoverhead Budgetedfixedoverhead Budgetvariance = –

  6. Computing Fixed Overhead Variances

  7. Computing Fixed Overhead Variances

  8. Predetermined Overhead Rates Predetermined overhead rate = Estimated total manufacturing overhead costEstimated total amount of the allocation base $360,00090,000 Machine-hours Predetermined overhead rate = Predetermined overhead rate = $4.00 per machine-hour

  9. Predetermined Overhead Rates Variable component of thepredetermined overhead rate = Variable component of thepredetermined overhead rate = $1.00 per machine-hour $90,00090,000 Machine-hours $270,00090,000 Machine-hours Fixed component of thepredetermined overhead rate = Fixed component of thepredetermined overhead rate = $3.00 per machine-hour

  10. Applying Manufacturing Overhead Overheadapplied Predetermined overhead rate Standard hours allowedfor the actual output = × Overheadapplied $4.00 permachine-hour = × 84,000 machine-hours Overheadapplied = $336,000

  11. Computing the Volume Variance Fixedoverheadapplied towork in process Budgetedfixedoverhead Volumevariance = – ( ) Volumevariance $3.00 per machine-hour $84,000 machine-hours = $270,000 – × Volumevariance = $18,000 Unfavorable

  12. Computing the Volume Variance Volume variance = FPOHR × (DH – SH) FPOHR = Fixed portion of the predetermined overhead rate DH = Denominator hours SH = Standard hours allowed for actual output ) ( $3.00 per machine-hour 90,000 mach-hours 84,000 mach-hours Volumevariance = × – Volumevariance = 18,000 Unfavorable

  13. Computing the Budget Variance Actualfixedoverhead Budgetedfixedoverhead Budgetvariance = – Budgetvariance = $280,000 – $270,000 Budgetvariance = $10,000 Unfavorable

  14. A Pictorial View of the Variances Fixed OverheadApplied toWork in Process BudgetedFixedOverhead ActualFixedOverhead 252,000 270,000 280,000 Volume variance, $18,000 unfavorable Budget variance, $10,000 unfavorable Total variance, $28,000 unfavorable

  15. 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.

  16. Graphic Analysis of FixedOverhead Variances Budget$270,000 Fixed overhead applied at $3.00 per standard hour Denominatorhours 0 0 90 Machine-hours (000)

  17. Graphic Analysis of FixedOverhead Variances Actual$280,000 { Budget Variance 10,000 U Budget$270,000 Fixed overhead applied at $3.00 per standard hour Denominatorhours 0 0 90 Machine-hours (000)

  18. Graphic Analysis of Fixed Overhead Variances Actual$280,000 { Budget Variance 10,000 U Budget$270,000 { Volume Variance 18,000 U Applied$252,000 Fixed overhead applied at $3.00 per standard hour Standardhours Denominatorhours 0 0 84 90 Machine-hours (000)

  19. Unfavorablevariances are equivalentto underapplied overhead. Favorablevariances are equivalentto overapplied overhead. The sum of the overhead variancesequals the under- or overappliedoverhead cost for the period. Reconciling Overhead Variances and Underapplied or Overapplied Overhead In a standardcost system:

  20. Reconciling Overhead Variances and Underapplied or Overapplied Overhead

  21. 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 unfavorable

  22. 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 unfavorable

  23. Computing the Sum of All Variances

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