Page 234 - DCOM206_COST_ACCOUNTING_II

Unit 12: Standard Costing

(b) Labour Rate Variance = AT (SR – AR) Notes
LRV = 40 (120 – 200) = 40 × 80
LRV = ` 3,200 (Adverse)
(c) Labour Efficiency Variance = SR (ST – AT)
LEV = 120 (60 – 40) = 120 × 20

LEV = ` 2,400 (Favourable)
Verification:
LCV = LRV + LEV
` 800 (A) = ` 3,200 (A) + ` 2,400 (F)

Overhead Variances

As is known very well, overhead expenses include indirect material cost, indirect labour cost
and other indirect expenses. These expenses pertain to all the three major functions of the
company. Overhead variances therefore relate to production overhead expenses, administrative
overhead expenses, selling and distribution overhead expenses. It may be noted here that these
expenses include both variable and fixed elements. For the purpose of computing overhead
variances, overhead expenses are classified into variable and fixed overhead expenses on the
basis of their behaviour to the levels of activity.
Overhead Cost Variance
Overhead cost variance can be defined as the difference between the standard cost of overhead
allowed for the actual output and the actual cost of overhead incurred for the actual output
achieved. Overhead cost variance may be either ‘under absorption of overheads’ or ‘over
absorption of overheads’. The formula used for calculating overhead cost variance is as follows:

Overhead Cost Variance = (Actual output × Standard overhead rate per hour) –
Actual overhead cost
OR OCV = (Standard hours for actual output × Standard overhead
rate per hour) – (Actual overhead cost)
Overhead variances are divided into two broad categories:
1. Variable Overhead Variance, and
2. Fixed Overhead Variance.
The following figure shows the division and subdivision of overhead variances:
1. Variable Overhead Variance: The variable overhead variance is a total or aggregate variance
and does not tell us much about the causes of variance. It is the difference between the
standard variable overhead allowed for actual production and the actual variable overhead
incurred. The method of computation is as follows:
Variable Overhead Variance = (Standard variable overhead rate × Actual production) –
(Actual variable overhead)

OR VOV = (Standard variable overhead) – Actual variable overhead

Note Standard Variable Overhead Rate = OR VOV= Variable overhead expenditure
variance + Variable overhead efficiency variance

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