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Manufacturing Overhead Variances Managerial Accounting Prepared by Diane Tanner University of North Florida Chapter 46.

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Presentation on theme: "Manufacturing Overhead Variances Managerial Accounting Prepared by Diane Tanner University of North Florida Chapter 46."— Presentation transcript:

1 Manufacturing Overhead Variances Managerial Accounting Prepared by Diane Tanner University of North Florida Chapter 46

2 Flexible Budget Overhead  Represents the overhead allowed at the number of units produced  Variable overhead  Variable cost per unit × number of actual units  Fixed overhead  Total fixed overhead  Same at all levels of activity

3 Applied Overhead Overhead costs are applied to products and services using a predetermined overhead rate (POHR) Applied Overhead = [FOHR × Actual Units Produced] + [VOHR × Actual Units Produced] Estimated VOH Variable Overhead rate (VOHR) = Estimated Units to Produce Estimated FOH Fixed Overhead rate (FOHR) = Estimated Units to Produce

4 Overhead Variances Overhead Controllable Variance Overhead Volume Variance Total Overhead Variance Actual VOH Actual VOH VOH rate × Actual units VOH rate × Actual units Actual FOH Actual FOH Budgeted FOH Budgeted FOH VOH rate × Actual units VOH rate × Actual units FOH rate × Actual units FOH rate × Actual units $Total

5 DR, Inc. provided the following information for overhead: Actual variable overhead = $14,500 Actual fixed overhead = $8,200 Budgeted variable overhead = $14,000 per unit Budgeted fixed overhead = $4 per unit Budgeted units produced = 2,000; Actual units produced = 2,040 DR applies overhead based on the number of units produced. DR, Inc. provided the following information for overhead: Actual variable overhead = $14,500 Actual fixed overhead = $8,200 Budgeted variable overhead = $14,000 per unit Budgeted fixed overhead = $4 per unit Budgeted units produced = 2,000; Actual units produced = 2,040 DR applies overhead based on the number of units produced. Overhead Variances Example Calculate the overhead rates: Estimated variable overhead Variable overhead rate = Estimated units to produce = $14,000 2,000 = $8,000 Estimated fixed overhead Fixed overhead rate = Estimated units to produce = 2,000 = $4.00 per unit $7.00 per unit

6 DR, Inc. provided the following information for overhead: Actual Overhead: Variable = $14,500; Fixed = $8,200 Budgeted variable overhead = $14,000 per unit Budgeted fixed overhead = $4 per unit Budgeted units produced = 2,000; Actual units produced = 2,040 DR applies overhead based on the number of units produced. DR, Inc. provided the following information for overhead: Actual Overhead: Variable = $14,500; Fixed = $8,200 Budgeted variable overhead = $14,000 per unit Budgeted fixed overhead = $4 per unit Budgeted units produced = 2,000; Actual units produced = 2,040 DR applies overhead based on the number of units produced. Overhead Variances Example = $22,700 = $22,280 = $22,440 Overhead controllable variance $420 unfavorable Overhead volume variance $160 favorable Total Overhead Variance = $260 unfavorable ActualFlexible Applied FOH VOH $14,500 $8,200 $7 * 2,040 = $14,280 $4 * 2,040 = $8,160 $8,000

7 Manufacturing Overhead Variances  Controllable variance  Who is responsible?  Production Supervisor  Managers are expected to control costs (and for some, revenues) to avoid substantial differences from budget amounts  Volume variance  Who is responsible?  No one  Exists because the volume of production/sales is less/more than budgeted Because we know why this variance exists.

8 Behavioral Considerations Standard costs and variance analysis can Provide very useful control measures Aid in performance evaluations Cause dysfunctional behavior among employees and managers Standard costs and variance analysis can Provide very useful control measures Aid in performance evaluations Cause dysfunctional behavior among employees and managers

9 9 The End


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