3. Standard Costing: variable and fixed Overheads

Question 1

TOTAL Fixed Overhead Variance =

Need to be able to work out the breakdown into:

EXPENDITURE Variance:
Budgeted cost of FO - Actual cost of FO
(Ignore the Volume difference betweek budget and actual for this calc)

VOLUME Variance:
*(Actual Output x OAR) - (Budgeted Output x OAR)
Notice that the Actual Output goes first in the sum .. so that if you made more units than budgeted the answer will be a positive number.

Remember the Actual output might be measured in Units (simple!) or might be DL hours or Machine hours (in which case just need to multiply the units by the relevant hours per unit figure.

It can be better to measure output in DL/Machine hours for example because it can help convert different kinds of output to a single form eg. carpenter producung tables and chairs..

Answer 1

Fixed OH absorbed - Actual cost of Fixed OH

1. Work out OAR according to the given base (Units, DL hours)
2. If units just multiply the units x OAR. If DL hours remember to multiply the units by the DL hours per unit first)
3. Subtract the actual cost (expenditure)

Question 2

Bit confusing but what to remember when calculating standard cost of actual production …

Answer 2

.. you do add up all the costs for 1 unit (DM; DL; Var OHs; Fixed OHs) ie. INCLUDING FIXED OH … and mutiply by the actual production… seems weird that the fixed OH doesn’t stay fixed

Question 3

What are we measuring with the:

Fixed Overhead Volume Variance?

Answer 3

The difference between the £OHs that would have been absorbed at the planned volume and The OH actually absorbed.

Need to do Actual - Planned…

So if volume is higher than planned you have over absorbed … which is favorable,

Question 4

When checking 2 OH sub-varances to check they match the overall variance remember…

Answer 4

.. to compare to the difference between the FLEXED (not original) budget and Actual budget …

The variances from Original to Actual would not be useful because they dont tell us anything

Question 5

with Absorption costing the variances to look at are:

1. The difference between what you actually absorbed and planned to absorb. (actual - planned.. positive is Favourable). NB Its the actual output at the standard hours if your absorption base is hours .. think of the bookkeeping … you would have used standard hours because you would have known the actual at that stage.
2. The difference between buget and actual expenditure.

The net of the 2 gets written off to P&L (positive is a credit as it’s like income)

Answer 5

.

Question 6

Fixed OHs for a biz using Marginal Costing …

Answer 6

..only one simple calc:
Budgeted OHs - Actual OHs.
If it’s positive it’s favourable … CR to P&L (like income)

Question 7

Fixed OHs for a biz using Absorption Costing

Answer 7

Overall Varience is the difference between the amount you absorbed (so actual quantity at budgeted OAR)

Breaks out into 2 subs:

1. Expenditure Var:
   Difference between budgeted cost and actual cost.
   (Same as the only calc for biz using marginal costing)
2. Difference between the amount you absorbed (ie. actual volume at budgeted OAR) and the amount that would have been absorbed if you’d made the budgeted volume.

Question 8

What to reember about volume variance for fixed OHs?

Answer 8

Its similar to the usage calc for Direct mat/lab which is:
(PAUS)
St pr x St usage - St Pr x Act usage

BUT its reversed

Actual output x OAR - Budgeted Output x OAR.
You’ll know by the volumes if the answer should be fav/adv …. if you made less its going to be adverse!!

ALWAYS check that the VOLUME VARIANCE you calculated PLUS the EXPENDITURE VARIANCE (difference between what was Budgeted to spend and the Actual amount spent)
EQUAL
The DIFFERENCE between the amount absorbed and the Actual Spend (Ie the amount needing CR/DR to the P&L)

Question 9

For FO Volume Variance, think about Open tuition lecture where you put actual units and then underneath minus the budgeted units and then multiply the answer by the OAR. (If you made more it should be favourable obviously)

Answer 9

OT Lecture ** MA Variance Analysis - part 3**

Remember £ Volume variance (made more/less)
Should equal labour £ Capacity + £ Efficiency Vars.

Ie If asked to explain volume variance .. eg we might have based production volume based on available labour .. we should be able to say the VV was because the labout worked more efficiently and/or we found extra capacity