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Performance Evaluation Using Variances from Standard Costs

Learn how to calculate and interpret factory overhead variances using standard costs. Explore flexible budgets, controllable variances, and volume variances in factory overhead analysis.

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Performance Evaluation Using Variances from Standard Costs

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  1. Performance Evaluation Using Variances from Standard Costs LO 4 – Computing Factory Overhead Variances

  2. LO 4 Factory Overhead Variances • Factory overhead costs are more difficult to analyze than direct labor and materials costs. This is because factory overhead costs have fixed and variable cost elements.

  3. LO 4 Factory Overhead Flexible Budget

  4. Budgeted Factory Overhead at Normal Capacity Normal Productive Capacity = Factory Overhead Rate $30,000 5,000 direct labor hours = Factory Overhead Rate = Factory Overhead Rate$6.00 per direct labor hour LO 4 Factory Overhead Flexible Budget

  5. Budgeted Variable Overhead at Normal Capacity Normal Productive Capacity Variable Factory Overhead Rate = $18,000 5,000 direct labor hours Variable Factory Overhead Rate = LO 4 Factory Overhead Flexible Budget Variable Factory Overhead Rate =$3.60 per direct labor hour

  6. Budgeted Fixed Overhead at Normal Capacity Normal Productive Capacity Fixed Factory Overhead Rate = $12,000 5,000 direct labor hours Fixed Factory Overhead Rate = LO 4 Factory Overhead Flexible Budget Fixed Factory Overhead Rate =$2.40 per direct labor hour

  7. LO 4 Factory Overhead Variances • Variances from standard for factory overhead cost result from: • Actual variable factory overhead cost greater or less than budgeted variable factory overhead for actual production • Actual production at a level above or below 100% of normal capacity

  8. Variable Factory Overhead Rate Standard Hours for Actual Units Produced x LO 4 Variable Factory Overhead Controllable Variance Variable Factory Overhead Controllable Variance Budgeted Variable Factory Overhead Actual Variable Factory Overhead – =

  9. $14,400 Variable Factory Overhead Controllable Variance $10,400 – $14,400 = Variable Factory Overhead Controllable Variance – $4,000 Favorable Variance = LO 4 Variable Factory Overhead Controllable Variance Variable Factory Overhead Controllable Variance Budgeted Variable Factory Overhead Actual Variable Factory Overhead – = 4,000 direct labor hours x $3.60

  10. LO 4 Factory Overhead Volume Variance • The fixed factory overhead volume variance is the difference between the budgeted fixed overhead at 100% of normal capacity, and the standard fixed overhead for the actual production achieved during the period.

  11. Fixed Factory Overhead Volume Variance Standard Hours for 100% of Normal Capacity Standard Hours for Actual Units Produced Fixed Factory Overhead Rate – x = Fixed Factory Overhead Volume Variance 5,000 direct labor hours 4,000 direct labor hours = – x $2.40 Fixed Factory Overhead Volume Variance $2,400Unfavorable Variance = LO 4 Fixed Factory Overhead Volume Variance

  12. LO 4 Fixed Factory Overhead Volume Variance

  13. LO 4 Reporting Factory Overhead Variances Total actual factory overhead $22,400 Factory overhead applied (4,000 hours x $6 per hour) 24,000 Total factory overhead cost variance (favorable) $ (1,600) F

  14. LO 4 Fixed Factory Overhead Volume Variance • An unfavorable volume variance may be due to factors such as the following: • Failure to maintain an even flow of work • Machine breakdowns • Work stoppages caused by lack of materials or skilled labor • Lack of enough sales orders to keep the factory operating at normal capacity

  15. LO 4 Reporting Factory Overhead Variances

  16. Applied factory overhead 24,000 4,000 hours x $6.00 per hour LO 4 Factory Overhead Account Factory Overhead Actual factory overhead 22,400 $10,400 + $12,000

  17. Overapplied factory overhead LO 4 Factory Overhead Account Factory Overhead Actual factory overhead 22,400 Applied factory overhead 24,000 Balance, June 30 1,600

  18. Budgeted Factory Overhead for Amount Produced Variable factory OH $14,400 Fixed factory OH 12,000 Total $26,400 LO 4 Factory Overhead Account Actual factory overhead $22,400 Applied factory overhead $24,000 Actual Factory Overhead $22,400 Applied Factory Overhead $24,000 $2,400 U – $4,000 F Controllable Variance Volume Variance

  19. Budgeted Factory Overhead for Amount Produced Variable factory OH $14,400 Fixed factory OH 12,000 Total $26,400 LO 4 Factory Overhead Account Actual factory overhead $22,400 Applied factory overhead $24,000 Actual Factory Overhead $22,400 Applied Factory Overhead $24,000 – $1,600 F Total Factory Overhead Cost Variance

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