Quiz 13: Overhead and Marketing Variances
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Volume Variance: It is the difference between the quantity sold or consumed by the company in actual and the quantity sold or consumed by the company as budgeted multiplied by the standard price per unit of the product sold or consumed.In the present case, the amount of unfavorable volume variance is $1.3 million. The estimated value of sales volume and fixed costs of overheads is also provided. The formula used for calculation of excess capacity is as follows: The equation used for calculation of volume variance is as follows: Now, by rearranging the above two equations, compute the value of excess capacity level as follows: Therefore the excess capacity level for the company comes out to be
Fixed Costs: These costs remain fixed irrespective of the level of output. It is immaterial that the company produces any product or not or it generates any income or not, these costs have to be paid by the company due to their fixed obligation. Fixed costs are irrelevant in relevant costing. Variable Costs: These cost changes with the level of output. Variable costs are considered relevant under relevant costing. a.In the present case, the information regarding the purchase departments fixed and the variable costs on the products is given. The amount of total costs incurred by the department are also provided. Performance Report: It is a detailed statement that includes the analysis of the results obtained from the working of an activity in a particular time period. It can be prepared for a department or for employees or for a single product as well. Before preparing the evaluation report for the department, first compute the Overhead rate per purchase order as follows: Therefore the Overhead Rate per Purchase Order comes out to be $70 per order. Now, prepare the Evaluation report as follows: The result of the above calculation is as follows: b.The cost of each purchase order in the purchasing department of the company $70 per order. So while taking this rate as a base, there was an amount of $60,000 which was left behind due to under charges of the said cost. The amount of the said $60,000 can be adjusted against the amount of $80,000 which represents the spending variance and against the $20,000 of volume variances. The amount of $20,000 i.e. the volume variance is representing the over utilization of the capacity in the company. c. In the present case, the purchasing department of the company has done excess processing of the purchase orders than the expectation of the company. So the costs that were incurred by the department came out to be more than the expectation. Therefore it is clear that the management of the company has not done a good task in the management of the costs. d.The purchasing department of the company should keep the following issues in mind: The price variances in the company for the items that were purchased shows that the purchase price is quiet low as per the expectation. The variances regarding the usage of materials show that if the material has met the standards of quality as maintained by the company. The delivery terms of the company should meet the criteria for issuing orders on time and delivering them to the customer on time as well.