Page 190 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 9: Variance Analysis

(b) If the standard overhead rate per hour is given Notes
= Standard Rate per Hour (Standard Hours for Actual Production – Budgeted
Production)
The next important variance is overhead effi ciency variance
(a) If the standard rate per unit is given
= Standard Overhead Rate per Unit (Actual Production – Standard Production
in Actual Hours)
(b) If the standard rate per hour is given
= Standard Overhead Rate per Hour (Actual Hours – Standard Hours for
Actual Production)

The last as well as most important variance
(a) If the standard rate per unit is given
= Standard Rate per Unit (Standard Production – Actual Production)
(b) When standard rate per hour is given
= Standard Rate per Unit (Actual Hours – Budgeted Hours of Production)

Example:
Standard hours = 6 per unit
Standard cost = ` 4 per hour
Actual hours taken = 640 hours
Actual production = 100 units

Actual overheads = ` 2,500

The first step is to determine the variable overhead cost variance
= Standard Variable Overhead Cost – Actual Variable Overhead Incurred

The next step is to find out the standard variable overhead cost for actual production
= Standard Hours per Unit × Standard Cost × Actual Production
= 6 per unit × ` 4 per hour × 100 units= ` 2,400
The next step is to determine the variance

= ` 2,400 – ` 2,500 = ` 100 (Adverse)
The next one is Expenditure variance
= Actual Hours (Standard Rate – Actual Rate)
The first step is to determine the actual hourly rate of the variable overheads

Total Actual Overheads
= Actual Hourly Rate of Variable Overheads =
Actual Hours Taken
` 2,500
= = ` 3.91
640 Hours
= 640 Hours (` 4 per unit – ` 3.9 per unit) = ` 64 (Favourable)
The next variance is to find out that variable overhead effi ciency variance

= Standard Rate (Standard Hours for Actual Output – Actual Hours)

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