## Quiz 13 :

Overhead and Marketing Variances

Answer:

Overhead spending variance:

This measure the difference between the actual overhead incurred and the overhead to be incurred on the actual volume worked. This variance will identify the things not explained by efficiency and volume variance.The formula to calculate overhead spending variance is shown below:

Here AOH = Actual overhead

FOH = Fixed overhead

VOH = Variable overhead

AV = Actual volume

Overhead efficiency variance:

This measures the difference between flexible budgets with actual volume and standard volume.The formula to calculate overhead efficiency variance is shown below:

Here, VOH = Variable overhead

AV = Actual volume

SV = Standard Variance.Overhead Volume Variance:

This measures the difference between the flexible and budgets with standard volume and absorbed overhead.The formula to calculate overhead volume variance is shown below:

Here,

FOH = Fixed overhead

AV = Actual volume

SV = Standard volume

BV = Budgeted volume

Therefore, Standard Volume is

.

Now substitute the value of SV in (b)

Next, substitute (c) in (a) as shown below:

Therefore, Variable overhead rate is

.

Substitute the value of VOH and SV in (b) as shown below:

Therefore, Actual volume is

.

Answer:

Standard Costing

It is a method of costing in which a standard cost is defined for each head of cost. The reason behind this is to provide a base for evaluation of actual performance. If actual performance is less than the standards set then there is a need to identify the cause and if actual performance is better than standard costs can be revised based on them.

Overhead Rate:

When all the overhead costs incurred by the company are summed up and divided by the appropriate allocation measure, the overhead rate is obtained. It can be calculated for both of the budgeted costs as well as the actual costs.

a.In the present case, the company is the manufacturing of two products. The company has no opening stock of the products. The information regarding the fixed and the variable costs and the standard direct labor hours is also given.

Compute the overhead rate at the beginning of the year as follows:

Therefore the Overhead rate comes out to be

per standard direct labor hour.

b.Compute the Volume Variance as follows:

Therefore the volume variance comes out to be

and it is unfavorable.

c.The volume variance as computed in part b above is unfavorable and it clearly states that the amount of fixed overheads is being absorbed by the company in the products. So if the company and the management is planning to write off the amount of volume variance to the cost of goods sold will lead to increase in the value of cost of goods sold and the overall profit of the company will get down by $750,000.

d.If the company and the management is planning to charge the volume variance to the cost of goods sold on the basis of prorated allotment then such allotment will be done in the two products.

It will bifurcated or prorated between the cost of goods sold and the value of goods in the closing stock. So prepare table for showing the prorated allotment as follows:

The result of the above calculation is as follows:

Note:

The figures mentioned in the above calculation are in thousands.

Answer:

Overhead Variances:

These refer to the differences between the actual overheads and applied overheads. Therefore, the variance computation can be done when the management knows the actual overhead costs.

Positive variance indicates a gain and negative variance indicates a loss.

The overhead variances are listed below:

1) Overhead spending variance.2) Overhead efficiency variance.3) Overhead Volume Variance.a)

Overhead spending variance:

This measure the difference between the actual overhead incurred and the overhead to be incurred on the actual volume worked. This variance will identify the things not explained by efficiency and volume variance.The formula to calculate overhead spending variance is shown below:

Here AOH = Actual overhead

FOH = Fixed overhead

VOH = Variable overhead

AV = Actual volume

Compute spending variance as shown below:

Overhead efficiency variance:

This measures the difference between flexible budgets with actual volume and standard volume.The formula to calculate overhead efficiency variance is shown below:

Here, VOH = Variable overhead

AV = Actual volume

SV = Standard Variance.Compute efficiency variance as shown below:

Overhead Volume Variance:

This measures the difference between the flexible and budgets with standard volume and absorbed overhead.The formula to calculate overhead volume variance is shown below:

Here,

FOH = Fixed overhead

AV = Actual volume

SV = Standard volume

BV = Budgeted volume

b)

Persons accountable for the variances:

1) Overhead spending variance:

The respective department managers are responsible for the spending variance. Therefore, the overhead should be disaggregated and the individual department managers should be held accountable for the spending variance.2) Overhead efficiency variance:

The foremen having the decision rights to supervise the assembly teams are accountable for efficiency variance and direct labor usage variance. Therefore, they are responsible for every difference between the actual and standard labor hours.

3) Overhead Volume Variance:

The volume variances may be higher or lower than the expectation. This indicates that either the marketing department is unable to generate sales or the plant managers are unable to provide the work force. The change in economy may also effect the variance.Therefore, either the plant super indent or marketing department are responsible for overhead volume variance.

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