Chapter 1 Flexible Budgeting and the Management of Overhead and Support Activity Costs Answer Key

Two variances are calculated and analyzed when evaluating fixed manufacturing overhead. The fixed overhead spending variance is the difference between actual and budgeted fixed overhead costs. The fixed overhead production volume variance is the difference between budgeted and applied fixed overhead costs. There is no efficiency variance for fixed manufacturing overhead. fixed overhead budget variance Variable overhead costs include costs of energy, machine maintenance, indirect materials, and indirect labor. Hence, manager should not always view a favorable variable overhead spending variance as desirable. The efficiency variance for variable overhead cost is based on the efficiency with which the cost allocation base was used to make the actual output.

With a difference in the rate of $0.21, we then multiply by actual labor hours of 4,750 incurred during the period , and that results in a variable OH spending variance of $1,000. The variance would be unfavorable since the variable overhead rate per direct labor hour was higher than the standard rate. The actual costs would be debited to Manufacturing Overhead and credited to a variety of accounts such as Accounts Payable, Accumulated Depreciation, Prepaid Insurance, Property Taxes Payable, and so on. According to the flexible budget, the standard number of machine-hours allowed for 11,000 units of production is 22,000 hours. Therefore, $ 110,000 of manufacturing overhead is applied to production ($ 5 per machine-hour times 22,000 hours) by debiting Work in Process Inventory and crediting Manufacturing Overhead for $ 110,000. Of course, that doesn’t mean that the total fixed overhead variances can be determined to be favorable yet. We need to check if the fixed overhead volume variance is favorable or unfavorable first.

Calculating Overhead Budget Variance

Variable overhead spending variance is favorable if the actual costs of indirect materials — for example, paint and consumables such as oil and grease—are lower than the standard or budgeted variable overheads. It is unfavorable if the actual costs are higher than the budgeted costs. Under Generally Accepted Accounting Principles , fixed manufacturing overhead costs are allocated as an inventoriable cost to the output units produced. Every output unit manufactured will include the fixed overhead cost per unit along with other costs. That is, for purposes of allocating fixed overhead costs to products, these costs are viewed as if they had a variable-cost behavior pattern.

Direct labor rate variance – Represents the comparison of the actual labor rate paid per direct labor hour to the budgeted or standard direct labor rate per hour. This difference is then multiplied by the actual number of labor hours to determine the variance.

Example of Variable Overhead Spending Variance

In our example, the company had an actual labor rate per hour of $8.50, which was $0.50 higher than the standard labor rate per hour of $8.00. When we multiply this $0.50 difference by actual labor hours in the period of 4,750, we arrive at a variance of $2,375. The variance is unfavorable as the actual labor rate per hour was higher than the budgeted. Suppose a company does not pay its fixed overheads completely in a year. This would increase the balance of current liability, suggesting liquidity issues with the company. In such cases, an analysis of fixed overhead spending variance would give management information on the liquidity that it needs to arrange to avoid a low current ratio. Favorable fixed overhead expenditure variance suggests that actual fixed costs incurred during the period have been lower than budgeted cost.

Variable costs come from very Bullen inputs. If we need to buy a factory, we buy it. That’s going to be a fixed cost, right?

Formula to Calculate Fixed Overhead Variance

Atlanta Enterprises incurred $828,000 of fixed overhead during the period. During that same period, the company applied $845,000 of fixed overhead to production and reported an unfavorable budget variance of $41,000. How much was Atlanta’s budgeted fixed overhead? Budgeted fixed overhead is the planned or scheduled fixed manufacturing https://accounting-services.net/ overhead cost. Though this estimated fixed overhead cost is easy to predict as it does not vary based on the result of production volume or activity, it can still be different from the actual fixed overhead cost that occurs. These calculations exist because each unit produced needs to carry a piece of the overhead costs.

• Above 65,000 pads, monthly fixed costs are $250,000.
• In the example that we took, the variance was a negative figure, i.e. ($10,000).
• Material cost was budgeted for $5 per pound and the actual cost was $8 per pound.
• If the budget includes the provision of business expansion, but the management did not actually carry out the business expansion.
• Journalize the adjusting of the Manufacturing Overhead account.
• It assumes that the fixed costs remain at the budgeted level and can be helpful to managers as they perform sensitivity analysis to see the effects of potential changes in sales volume .

B) Variable overhead costs have no production-volume variance. C) Variable overhead costs have no spending variance. D) Variable overhead costs have no efficiency variance.

Actual direct labor usage was 197,000 minutes at a total cost of $25,610. Overapplied overhead can also be the result of a budget variance. However, the actual cost of fixed overhead that incurs in the month of August is $17,500. If the budget includes the provision of business expansion, but the management did not actually carry out the business expansion.

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