C OST ACCOUNTING
Lesson Eight The variances indicated above are defined as follows: Overhead Total Variance: Is the difference between the standard overhead cost specified for the production achieved and the actual cost incurred. Overhead Expenditure Variance: Is the difference between the actual overheads expenditure and the budgeted overheads. Overhead Efficiency Variance: Is the difference between the standard overhead rate for the production achieved and the standard overhead rate for the actual hours taken. S TRATHMORE U NIVERSITY STUDY PACK Overhead Total Variance Overhead Expenditure Variance Overhead Efficiency Variance Overhead Volume Variance 292
293 Standard Costing Overhead Volume Variance Is the difference between the standard overhead cost of the actual hours taken and the flexed budget allowance for the actual hours taken. The above narrations are summarized in the below formulae: Actual Total Overheads Expenditure Less: Variance Budgeted Total Overheads Less: Volume Overhead Actual Hours x O.A.R Variance Total Variance Less: Standard Hours Produced x O.A.R Efficiency Variance NB: O.A.R = Total Overhead Absorption Rate. Using our basic data, we can calculate the total overhead variances using the alternative approach as follows: Overheads Expenditure Variance = (Actual – Budgeted) Overheads = Shs.26,030 – Shs.24,080 = Shs.1,950 Unfavourable Overheads Volume Variance = Budgeted Overheads – (Actual Hrs x O.A.R) = Shs.24,080 – (3,150 x 7.5) = Shs.455 Unfavourable Overheads Efficiency Variance = (Actual Hours x A.O.R) – Standard hours x O.A.R produced = (3,150 x 7.5) – (2,330 x 7.5) = Shs.600 Favourable *Note that this figure is arrived at by flexing the budget as follows: Shs Fixed Overheads: 11,480 Variable Overheads: (3,150 x 4) 12,600 24,080 You need to keenly note that this latter method is merely a summary of the variable and fixed overhead variances calculated earlier using the previous method as shown below: Expenditur Efficiency Capacity Total C OST ACCOUNTING
Lesson Eight e Variable overhead variance 1,330 (U) 320 (F - 1,010 (U) Fixed overhead variances 620 (U) 280 (F) 455(U) 795 (U) Total overhead variances as calculated above 1,950 (U) 600 (F) 455 (U) 1,805 (U) What was previously capacity variance is directly equivalent to the volume variance when the total overhead approach is used. What Causes Overhead Variances? Overhead variances arise mainly due to the conventions of the overheads absorption process. The overhead absorption rates utilized in this process are calculated form two main estimates: i. Estimates of expenditure levels. ii. Estimates of the activity levels during the budget period. Since the two elements are mere estimates, they hardly coincide with reality, and therefore will almost certainly cause a favourable or unfavourable variance in any given accounting period. Overhead variances are also caused by efficiency variations. Because overheads are frequently absorbed into production by means of labour hours, overhead variances arise when labour efficiency is greater or less than planned.
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