Page 162 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Unit 7: Budgeting: Tool for Management Control

Efficiency Variance = (Inputs actually used _ Inputs that should i.e., direct labour Notes
have been used) × Standard unit price of inputs
= (790 – 800) × 17

= 170 F
The efficiency variance for variable overhead is a measure of the extra overhead incurred (or
saved) solely, because the chosen cost drivers' inputs actually used differ from the inputs that
should have been used.
Spending/Expenses overhead variable is defined as the actual amount of overhead incurred
minus the expected amount based on flexible budget for actual inputs. Expressed another way,
the spending variance for variable overhead is the flexible budget variance minus the efficiency
variance. The spending variance is really a composite of price and other factors. It is the part of
the flexible budget variance unexplained by the efficiency variance attributable to the relationship
of variable overhead to direct labour. In this case, variable overhead spending variance = Flexible
budget variance - Efficiency variance.
= 650 (A) – 170 F = 820 (A)

Fixed Overhead Variance = Actual Costs _ Applied: Standard Inputs allowed for Actual
outputs × Budgeted Rate
 Standard Inputs Allowed for Actual Output × Budgeted Rate

= 20,200 – 800 × 20
= 4200 (A) [under applied fixed overhead]
Fixed overhead production volume variance arises when actual volume is different from
denominator volume.
Production Volume Variance = Budgeted fixed overhead – Applied Fixed Overhead
(Denominator volume Actual outputs) in units – in product
units of standard inputs × Budgeted fixed overhead per
product unit
= (1,000 – 800) × 20

= 4,000 (A)
Since production volume is less than denominator value, volume variance is adverse. Spending/
Expense Fixed Overhead Variance

= Budget – Actual
= 20,000 – 20,200
= 200 (A)
Option B: If combined (total) single one rate is used, the rate will 20 + 17 = ` 37. Combined
factory overhead variance = Actual Costs – Applied
= 34,450 – 800 × (17 + 20) = 4,850 (A)
Production Volume Variance = Budgeted Total Overhead – Applied

= (13,600 + 20,000) – 800 × (37)
= 33,600 – 29,600
= 4,000 (A)

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