Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 10

Would the choice of denominator level affect the amount of the fixed factory overhead budget variance? Production-volume variance? Explain.

Step 1 of 3

In order to manipulate the reported income, practice of managing earnings being used. Managing earnings is possible with the choice of denominator level used to set the fixed overhead application rate. We can understand that, different denominator levels lead to different fixed overhead application rates. Consequently, productions costs and variances differ from what ought to come.