Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System Appendix 11A Appendix 11A: Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System

Compute and interpret the fixed overhead volume and budget variances. Learning Objective 11-4 Compute and interpret the fixed overhead volume and budget variances. Learning objective 11-4 is to compute and interpret the fixed overhead budget and volume variances.

Fixed Overhead Volume Variance Fixed Overhead Applied Budgeted Fixed Overhead Actual Fixed Overhead Volume variance The volume variance is budgeted fixed overhead minus the fixed overhead applied to work in process. Fixed overhead applied to work in process Budgeted fixed overhead Volume variance = –

Fixed Overhead Volume Variance Fixed Overhead Applied Budgeted Fixed Overhead Actual Fixed Overhead SH × FR DH × FR Volume variance The volume variance can also be computed by multiplying the fixed portion of the predetermined overhead rate times the difference between denominator hours and standard hours. The equation on the prior slide and this equation result in identical answers. Both variance computations will be demonstrated in the forthcoming example.  Volume variance = FPOHR × (DH – SH) FPOHR = Fixed portion of the predetermined overhead rate DH = Denominator hours SH = Standard hours allowed for actual output

Fixed Overhead Budget Variance Fixed Overhead Applied Budgeted Fixed Overhead Actual Fixed Overhead Budget variance The equation for computing the budget variance is shown on this slide. It is simply the difference between the actual fixed manufacturing overhead and the budgeted fixed manufacturing overhead for the period. Actual fixed overhead Budgeted fixed overhead Budget variance = –

Predetermined Overhead Rates Estimated total manufacturing overhead cost Estimated total amount of the allocation base = Predetermined overhead rate $360,000 90,000 Machine-hours = The predetermined overhead rate is equal to the estimated total manufacturing overhead cost divided by the estimated total amount of the allocation base. ColaCo’s predetermined overhead rate is $4.00 per machine hour. Predetermined overhead rate = $4.00 per machine-hour

Predetermined Overhead Rates Variable component of the predetermined overhead rate $90,000 90,000 Machine-hours = = $1.00 per machine-hour Fixed component of the predetermined overhead rate $270,000 90,000 Machine-hours = = $3.00 per machine-hour The predetermined overhead rate can be broken down into a variable component and a fixed component. The variable component is $1.00 per machine-hour. The fixed component, which will be used to compute the volume variance is $3.00 per hour.

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 = The total overhead applied to work in process is computed by multiplying the predetermined overhead rate times the standard hours allowed for the actual output. The total overhead applied to work in process is $336,000. In the job-order costing chapter, we used the actual level of activity to apply overhead costs to work in process. The different approach arises because we are using a standard cost system in this chapter and the job-order costing chapter uses a normal costing system.

Computing the Volume Variance Fixed overhead applied to work in process Budgeted fixed overhead = – Volume variance = $270,000 – $3.00 per machine-hour ( × $84,000 machine-hours ) The volume variance is budgeted fixed overhead minus the fixed overhead applied to work in process. The fixed overhead applied to work in process is equal to the fixed component of the predetermined overhead rate times the standard hours allowed for the actual output. The fixed overhead applied to work in process ($252,000) is computed by multiplying the fixed component of the predetermined overhead rate ($3.00) by the standard machine-hours allowed for the actual output (84,000 hours). The volume variance is $18,000 unfavorable. Volume variance = $18,000 Unfavorable

Computing the Volume Variance = FPOHR × (DH – SH) FPOHR = Fixed portion of the predetermined overhead rate DH = Denominator hours SH = Standard hours allowed for actual output Volume variance = $3.00 per machine-hour ( × 90,000 mach-hours – 84,000 ) The volume variance can also be computed by multiplying the fixed portion of the predetermined overhead rate times the difference between denominator hours and standard hours. The volume variance is $18,000 unfavorable. Because the standard hours allowed is less than the denominator volume hours, it presumably signals inefficient usage of facilities. Therefore, the variance is labeled as unfavorable.   Volume variance = 18,000 Unfavorable

Computing the Budget Variance Actual fixed overhead Budgeted fixed overhead Budget variance = – Budget variance = $280,000 – $270,000 The budget variance of $10,000 is the difference between the actual fixed overhead ($280,000) and the budgeted fixed overhead ($270,000). The variance is labeled as Unfavorable because the company actually incurred more cost than the budget projected. Budget variance = $10,000 Unfavorable

A Pictorial View of the Variances Fixed Overhead Applied to Work in Process Budgeted Fixed Overhead Actual Fixed Overhead 252,000 270,000 280,000 Volume variance, $18,000 unfavorable Budget variance, $10,000 unfavorable This slide offers a pictorial view of the computation of the fixed overhead budget and volume variances.   Total variance, $28,000 unfavorable

End of Appendix 11A End of appendix 11A.