38. Factory Overhead Cost Variances

Question 1

How is the variable overhead spending variance calculated using both the framework approach and formula approach?

Answer 1

• Using the framework approach, the variable overhead spending variance is calculated by comparing the Total Actual Costs to the Actual Activity Used × Standard Variable Overhead Rate. The actual activity used refers to the activity of the base that the organization uses to apply overhead costs.
• Using the formula approach, it is calculated as (Actual Activity Used × Standard Rate) − Actual Costs.

Question 2

How is the variable overhead efficiency variance calculated using both the framework approach and formula approach?

Answer 2

• Using the framework approach, the variable overhead spending variance is calculated by comparing the Actual Activity Used × Standard Variable Overhead Rate to the Standard Activity Allowed × Standard Variable Overhead Rate.
• Using the formula approach, it is calculated as (Standard Activity Allowed − Actual Activity Used) × Standard Rate.

Question 3

Why would an organization calculate fixed manufacturing overhead variances when the costs are fixed?

Answer 3

By establishing a fixed overhead rate and applying costs to each unit of output, the cost application process treats fixed costs as if they were variable. This process creates a signal on how the actual production output compares to the expected production output.

Question 4

How is the fixed overhead spending variance calculated under both the framework approach and the formula approach?

Answer 4

• Under the framework approach the variance is calculated by comparing the total actual costs to the master budget costs.
• Under the formula approach, it is calculated as the (Master Budget Production Volume × Fixed Overhead Rate) − Actual Costs Spent. It can also be calculated as the Master Budget Costs − Actual Costs Spent

Question 5

How is the fixed overhead volume variance calculated under both the framework approach and the formula approach?

Answer 5

• Under the framework approach the variance is calculated by comparing the master budget costs to the applied costs.
• Under the formula approach, it is calculated as the (Actual Production Volume − Master Budget Volume) × Fixed Overhead Rate. It can also be calculated as the Applied Costs − Master Budget Costs