This accounting objective is no different than

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: accounts. This accounting objective is no different than observed for direct material and direct labor! On the left-hand side of the following graphic, notice that more is spent on actual variable factory overhead than is applied based on standard rates. This scenario produces unfavorable variances (also known as “under applied overhead” since not all that is spent is applied to production). The righthand side is the opposite scenario (favorable/over applied overhead). Beneath the graphics are Taccounts intending to illustrate the cost flow. As monies are spent on overhead (wages, utilization of indirect materials, etc.), the cost (xxx) is transferred to the Factory Overhead account. As production occurs, overhead is applied/transferred to Work in Process (yyy). When more is spent than applied (as on the left scale), the balance (zz) is transferred to variance accounts representing the unfavorable outcome. When less is spent than applied (as on the right scale), the balance (zz) represents the favorable overall variances. 4.11 Exploring Variable Overhead Variances A good manager will want to explore the nature of variances relating to variable overhead. It is not sufficient to simply conclude that more or less was spent than intended. As with direct material and direct labor, it is possible that the prices paid for underlying components deviated from expectations (a variable overhead spending variance). On the other hand, it is possible that the company’s productive efficiency drove the variances (a variable overhead efficiency variance). Thus, the Total Variable Overhead Variance can be divided into a Variable Overhead Spending Variance and a Variable Overhead Efficiency Variance. Download free ebooks at 34 Variance Analysis Tools for Enterprise Performance Evaluation Before looking closer at these variances, it is first necessary to recall that overhead is usually appliedlooking closer at these variances, it isas $Xnecessary to recall that overhead is usually to Before based on a predetermined rate, such first per direct labor hour (you may find it helpful review this conceptpredetermined rate, Managerial per direct Accounting(you may find it helpfulthe applied based on a from Part 3 of the such as $X and Cost labor hour book. This means that to amountthis concept from Part 3 of is driven by the and Cost Accounting approach. This will become review debited to work in process the Managerial overhead application book. This means that the clearer with the to work in illustration. amount debited following process is driven by the overhead application approach. This will become clearer with the following illustration. 4.12 An Illustration of Variable Overhead Variances Let’s return to the illustration of Blue Rail. Variable factory overhead for August consisted 4.12 An Illustration for Variable Overhead Variances primarily of to the illustration for Blue Rail. Variable factory paint, etc.), indirect labor (inspector Let’s return indirect materials (welding rods, grinding disks, overhead for August consisted time, s...
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online