Page 135 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes The next step is to find out the standard hours for actual output

= Standard Hours × Actual Output = 6 hours per unit × 100 Units = 600 Hours
= ` 4 (600 Hours – 640 Hours) = ` 160 (Adverse)

Example: Budgeted hours for month of Mar. 2004, 180 units
Standard rate of article produced per hour 50 units
Budgeted fi xed overheads ` 2,700
Actual production March 2004; 9,200 units
Actual hours for production 175 hours
Actual fi xed overheads ` 2,800
Calculate overhead cost variance, overhead budget variance, overhead volume variance,
overhead efficiency variance and overhead capacity variance.

Solution:
The first one to determine the overhead cost variance

= Standard Overhead Cost – Actual Overhead Cost
The standard overhead cost is to be found out
Standard overhead cost for actual production has to be computed from the below given
formula
= Standard Rate per Unit × Actual Production in Units
First step is to determine the standard rate per unit =
Budgeted Fixed Overheads
Budgeted Hours × Standard Rate of Article Produced per hour

` 2,700
= = .3 paise
180 50
×

The next one is to find out the overhead cost
= 9,200 units × .30 paise = ` 2,760
Overhead Cost Variance = ` 2,760 – ` 2,800 = ` 40 (Adverse)
Overhead Budget Variance = Budgeted Overhead – Actual Overhead
= ` 2,700 – ` 2,800 = ` 100 (Adverse)

Overhead Volume Variance = Standard Overhead – Budgeted Overhead
= ` 2,760 – ` 2,700 = ` 60 (Favourable)
The overhead efficiency variance could be calculated in two different ways.

The efficiency is expressed in terms of hours and units. If the firm is able to produce the goods

or articles in lesser hours of duration, known as more efficient in time management than the
standard.

Likewise, the efficiency could be denominated in terms of units of production. If the actual
production is more than that of the standard production in units, the firm is favourable in position

in producing the articles than the standard.
Overhead Efficiency Variance = (Actual Production in Units – Standard Production in

Units) × Standard Rate
= (9,200 units – 8,750 units) .30 = 450 units .30 = 135 (Favourable)

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