5.3 Variable overhead variances & Fixed production overhead cost variances

Question 1

Variable overhead variances

Answer 1

Variable overhead total variance (difference between variable overhead that should be used for actual output and variable production overhead actually used)
- Variable overhead expenditure variance (paying more or less than expected per hour of variable overheads, which hrs depends on recovery base)
- Variable overhead efficiency variance (using more or less variable overheads per unit than expected)

Question 2

Variable overhead total variance

Answer 2

Actual cost for Actual units
Less: Actual units X Std cost per hr

Question 3

Variable overhead expenditure variance

Answer 3

Actual cost for Actual hrs worked
Less: Actual hrs worked X Std cost per hour

(when recovery base is labour hrs and there is idle time, calculated using active hours worked)

Question 4

Variable overhead efficiency variance

Answer 4

Actual hours for Actual units
Less: Actual units X Std hrs per unit
X Std rate per hour

Question 5

Fixed production overhead cost variances

Answer 5

Fixed overhead total variance
- Fixed overhead expenditure variance
- Fixed overhead volume variance
* Fixed overhead capacity variance
* Fixed overhead efficiency variance

Question 6

Fixed production overhead total variance

Answer 6

Actual cost for Actual units
Less: Actual units X Std rate per unit

Question 7

Fixed production overhead expenditure variance

Answer 7

Actual overhead
Less: Budgeted overhead

Question 8

Fixed production overhead volume variance

Answer 8

Actual units produced
Less: Budgeted units
X Std absorption rate per unit

Question 9

In absorption costing systems if the fixed overhead is absorbed based on hours then

Answer 9

The absorption rate per hour must be used instead of units:
Actual units X Std hrs per unit X Std absorption rate per hour
Less: Budgeted hours X Std absorption rate

Question 10

In absorption costing systems if the fixed overhead is absorbed based on hours then it can be split into:

Answer 10

• Fixed overhead capacity variance - measures whether the workforce worked more or fewer hours than budgeted for the period
• Fixed overhead efficiency variance - measures whether the workforce took more or less time than standard in producing their output for the period

Question 11

Fixed overhead capacity variance =

Answer 11

Actual hours X FOAR per hour
Less budgeted expenditure

• If actual hours > budgeted hours = Favourable (greater capacity to produce units)

Question 12

Fixed overhead efficiency variance =

Answer 12

Actual hours X FOAR per hour
Std hours for Actual production X FOAR per hour

If actual hours < std hours = Favourable

Question 13

Potential causes of fixed and variable overhead variances:

Answer 13

• Fixed overhead expenditure adverse variances are caused by spending in excess of the budget
• Fixed overhead volume variances are caused by changes in production volume
• Variable production overhead expenditure variances are often caused by changes in machine running costs
• Fixed and variable production overheads efficiency variation causes are similar to those for direct labour efficiency variances

Question 14

Interdependence between variances means it might be necessary to look at several variances together not in isolation, for example:

Answer 14

• Using cheaper materials will result in a favourable material price variance, but it might also increase wastage (adverse material usage) and reduce labour productivity (adverse labour and variable overhead efficiency)
• Using more experienced labour to do the work will result in adverse labour rate variance but productivity might be higher resulting in favourable labour and variable overhead efficiency
• Workers trying to improve productivity (favourable efficiency variance) in order to win a bonus (adverse rate variance) might use materials wastefully in order to save time (adverse materials usage)
• Cutting sales prices (adverse sales price variance) might result in higher sales demand from customers (favourable sales volume variance)

Question 15

An operating statement is a

Answer 15

• Top level variance report, reconciling the actual and budgeted profit for the period
• Management will want unusual or unexpected items brought to their attention (exception reporting)
• This will take the form of a reconciliation which highlights the variances between figures in as much detail as possible

Question 16

Variance analysis using ABC costing

Answer 16

• ABC is a method for determining the std costs and will have implications for some of the variances calculated
• The use of ABC is most likely to impact overhead variances
• Typically std costs can be compared to actual and overhead expenditure and efficiency variance calculated