Page 242 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 11: Variance Analysis

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

= Standard Rate (Standard Hours for Actual Output – Actual Hours)
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 fixed overheads 2,700
Actual production March 2004; 9,200 units
Actual hours for production 175 hours
Actual fixed 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

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