1 Brenda Mallouk Overhead Variance Analysis Management Accounting One

2 Brenda Mallouk Compare to original plans Pinpoint discrepancies Take corrective action Advantage of Identification of Variances

3 Brenda Mallouk Analyzing Overhead Variances Í Split mixed costs into their fixed Í Establish a fixed overhead rate and a variable overhead rate and variable components

4 Brenda Mallouk Overhead Variances Can Result From Actual Overhead > or < Budget Actual Production > or < 100% of Normal Capacity

5 Brenda Mallouk Two Way Variance Analysis Overhead Budget (Controllable) Variance Overhead Volume Variance (combines the spending and efficiency overhead variances)

6 Brenda Mallouk Budget (Controllable) Overhead Variance Two Way Variance Analysis 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

7 Brenda Mallouk Fixed Overhead Volume Variance This is the difference between the budgeted fixed overhead at 100% of normal capacity and the standard fixed overhead for the actual production achieved during the period. Budgeted Fixed O/H - Standard Fixed O/H for Production Attained Two Way Variance Analysis

8 Brenda Mallouk Three Way Variance Analysis Variable Overhead Spending Variance Overhead Volume Variance Variable Overhead Efficiency Variance subdivides the budget variance into variable spending and efficiency variances

9 Brenda Mallouk Indicates the difference between actual variable overhead costs and variable overhead costs allowed for the actual hours Three Way Analysis Variable Overhead Spending Variance -- Formula: Total Actual Variable Overhead Costs - (Actual Hours x Standard Variable Overhead Rate)

10 Brenda Mallouk Three Way Analysis Indicates the difference between the standard variable overhead cost for actual hours and the standard variable overhead cost for the allowed hours for the production attained. Variable Overhead Efficiency Variance -- Formula: (Actual Hours x Standard Variable Overhead Rate) - (SH A x SVR)

11 Brenda Mallouk Three Way Analysis Overhead Volume Variance Same as two way variance analysis

12 Brenda Mallouk Four Way Variance Analysis Variable Overhead Spending Variance Fixed Overhead Volume Variance Variable Overhead Efficiency Variance Fixed Overhead Budget Variance * * (Indicates the difference between actual and budgeted fixed factory overhead)

13 Brenda Mallouk Four Way Variance Analysis Variable Overhead Spending Variance (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 Hours x Standard Variable Overhead Rate)

14 Brenda Mallouk Four Way Variance Analysis Variable Overhead Efficiency Variance (AH x SVOR) - (SH A x SVOR) (Actual Hours x Std. Variable Rate) - Budgeted Variable Overhead for Production Attained Overhead Volume Variance Flexible Budget - Standard Fixed O/H for Actual Production Budgeted Fixed O/H Cost - (SH A x SFOR)

15 Brenda Mallouk Forester Creations Ltd. has the following budgeted standard costs for a quarterly production volume of 2,500 units. Budgeted Cost -- An Example Direct materials (5 $2.00)$10.00 Direct labour (3 $5.00)15.00 Factory overhead Variable (3 labour $2.00)6.00 Fixed (3 labour $4.00)* Total standard cost$43.00 * based on budget of $30,000 for 2,500 units which require 3 hours per unit

16 Brenda Mallouk 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 $2.10) 37,800 Direct labour (8,900 $5.20)46,280 Factory overhead: Variable 17,000 Fixed 30,000 Total manufacturing costs$ 131,080 Actual Cost -- An Example

17 Brenda Mallouk Flexible Budget Comparison ActualFlexibleVariance Budget F or U Volume3,000 3,000 Variable Costs: Direct Materials$37,800$30,000$7,800 U Direct Labour 46,280 45,000 1,280 U Var. Factory Overhead 17,000 18,000 1,000 F Fixed Factory Overhead 30,000 30,000 0 Total $131,080 $123,000$8,080 U An Example

18 Brenda Mallouk Material Variances TMV =Actual Costs - Flexible Budget Costs (AQ u x AP) - (SQ A x SP) = (18,000 x $2.10) - (15,000 x $2) = $7,800 U AQ u =Actual Quantity of materials used SP=Standard Unit Price of materials SQ A =Standard Quantity of materials allowed for units manufactured AP=Actual Unit Price of materials used AQ P = Actual Material Purchased

19 Brenda Mallouk Material Variances Actual Cost - Actual Quantity at Standard Cost (AQ P x AP) - (AQ P 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

20 Brenda Mallouk Material Variances Actual Cost - Actual Quantity at Standard Cost (AQ u x AP) - (AQ u 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

21 Brenda Mallouk Material Variances Actual Quantity at -Flexible Budget Standard Cost (AQ u x SP) - (SQ A x SP) (18,000 x $2.00) - (15,000 x $2.00) $6,000 U Material Quantity Variance

22 Brenda Mallouk AH=Actual direct labour hours SR=Standard rate of pay per direct labour hour SH A =Standard direct labour hours allowed for the units manufactured AR=Actual rate pay per direct labour rate Labour Variances TLV = Actual Cost - Flexible Budget = (AH x AR) - (SH A x SR) Where --

23 Brenda Mallouk 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

24 Brenda Mallouk Labour Variances Actual Hours at - Flexible Budget Standard Cost (AH x SR) - (SH A x SR) (8,900 x $5.00) - (9,000 x $5.00) $500 F Labour Efficiency Variance

25 Brenda Mallouk Two Way Overhead Analysis TOV = Actual Variable Overhead Cost - Budgeted Variable Overhead for Actual Production = (AH x AR) - [(SH A x SVOR) Where: AH = Actual Hours AR = Actual Rate SH A = Standard Hours Allowed for Actual Production

26 Brenda Mallouk Two Way Overhead Analysis Overhead Controllable (Budget) Variance $17,000 - (9,000 x $2.00) Actual Variable Overhead Cost - Flexible Variable Budget Total Variable Overhead Costs - SH A x SVOR = $1,000 F

27 Brenda Mallouk Two Way Overhead Analysis Overhead Volume Variance $30,000] - ($4 x 9,000) Flexible Budget - Standard Fixed Overhead for Production Attained Budgeted Fixed Overhead Cost - [(SH A x SFOR) $6,000 F

28 Brenda Mallouk Three Way Overhead Analysis Variable Overhead Spending Variance Variable Overhead Efficiency Variance Overhead Volume Variance

29 Brenda Mallouk AH=Actual direct labour hours SR=Standard variable rate per direct labour hour SH A =Standard direct labour hours allowed for 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) - (SH A x SVOR) Where --

30 Brenda Mallouk Variable Overhead Spending Variance Total Actual Variable Overhead Costs - (Actual Hours x Standard Variable Overhead Rate) $17,000 - [(8,900 x $2.00) = $800 F Three Way Overhead Variance

31 Brenda Mallouk Overhead Efficiency Variance (Actual Hours x Standard Variable Overhead Rate) - (SH A x SVR) (8,900 x $2.00) - (9,000 x $2.00) = $200 F Three Way Overhead Variance

32 Brenda Mallouk Three Way Overhead Variance Overhead Volume Variance Same as the Two Variance Method

33 Brenda Mallouk Four Way Overhead Analysis Variable Overhead Spending Variance Actual Variable Overhead Cost - (AH x SVOR) = $800 F Fixed Overhead Budget Variance indicates the difference between actual and budgeted fixed overhead Actual Fixed O/H Costs - Budgeted Fixed O/H Costs $30,000 - $30,000 = $ 0

34 Brenda Mallouk Four Way Overhead Analysis Variable Overhead Efficiency Variance (AH x SVOR) - (SH A x SVOR) = $200 F Overhead Volume Variance Flexible Budget - SFOR x Good Output Budgeted Fixed O/H Cost - (SFOR x SH A ) $30,000 - ($4.00 x 9,000) $6,000 F

35 Brenda Mallouk 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 to work in process and finished goods and cost of goods sold if material. 1 not significant in amount