Appendix 10A: Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System
Let’s look at a graph showing fixed overhead variances. We will use ColaCo’s numbers from the previous example.
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Appendix 10APredetermined Overhead Rates and Overhead Analysis in a Standard Costing SystemLearning Objective 4(Appendix 10A)Compute and interpret the fixed overhead budget and volume variances.Budget varianceFixed Overhead Budget VarianceBudget varianceBudgeted fixed overheadActual fixed overhead=–Actual Fixed OverheadFixed OverheadAppliedBudgeted Fixed OverheadVolume varianceFixed Overhead Volume VarianceVolume varianceFixed overhead applied to work in processBudgeted fixed overhead=–Actual Fixed OverheadFixed OverheadAppliedBudgeted Fixed OverheadFPOHR = Fixed portion of the predetermined overhead rate DH = Denominator hours SH = Standard hours allowed for actual outputSH × FPOHRDH × FPOHRFixed Overhead Volume VarianceVolume varianceFPOHR × (DH – SH)=Actual Fixed OverheadFixed OverheadAppliedBudgeted Fixed OverheadVolume varianceComputing Fixed Overhead VariancesComputing Fixed Overhead VariancesPredetermined Overhead RatesPredetermined overhead rateEstimated total manufacturing overhead cost Estimated total amount of the allocation base=Predetermined overhead rate$360,000 90,000 Machine-hours=Predetermined overhead rate= $4.00 per machine-hourPredetermined Overhead RatesFixed component of the predetermined overhead rate$270,000 90,000 Machine-hours=Fixed component of the predetermined overhead rate= $3.00 per machine-hourApplying Manufacturing OverheadOverhead appliedPredetermined overhead rateStandard hours allowed for the actual output=×Overhead applied$4.00 per machine-hour84,000 machine-hours=×Overhead applied$336,000=Computing the Budget VarianceBudget varianceBudgeted fixed overheadActual fixed overhead=–Budget variance= $280,000 – $270,000Budget variance= $10,000 UnfavorableComputing the Volume VarianceVolume varianceFixed overhead applied to work in processBudgeted fixed overhead=–Volume variance= $18,000 UnfavorableVolume variance= $270,000 –$3.00 permachine-hour(×$84,000machine-hours)Computing the Volume VarianceFPOHR = Fixed portion of the predetermined overhead rate DH = Denominator hours SH = Standard hours allowed for actual outputVolume varianceFPOHR × (DH – SH)=Volume variance=$3.00 permachine-hour(×90,000mach-hours–84,000mach-hours)Volume variance= 18,000 UnfavorableA Pictorial View of the VariancesFixed Overhead Applied to Work in ProcessActual Fixed OverheadBudgeted Fixed Overhead 252,000270,000280,000Total variance, $28,000 unfavorableBudget variance,$10,000 unfavorableVolume variance,$18,000 unfavorableFixed Overhead Variances – A Graphic Approach Let’s look at a graph showing fixed overhead variances. We will use ColaCo’s numbers from the previous example. Graphic Analysis of Fixed Overhead VariancesMachine-hours (000) Budget $270,00090Denominator hours00Fixed overhead applied at$3.00 per standard hourGraphic Analysis of Fixed Overhead VariancesActual $280,000Machine-hours (000) Budget $270,00090Denominator hours00Fixed overhead applied at$3.00 per standard hourBudget Variance 10,000 U{Applied $252,000Machine-hours (000) Budget $270,000Graphic Analysis of Fixed Overhead Variances908400Standard hoursFixed overhead applied at$3.00 per standard hourDenominator hoursBudget Variance 10,000 UVolume Variance 18,000 U{{Actual $280,000Reconciling Overhead Variances and Underapplied or Overapplied OverheadIn a standard cost system:Favorable variances are equivalent to overapplied overhead.The sum of the overhead variances equals the under- or overapplied overhead cost for the period.Reconciling Overhead Variances and Underapplied or Overapplied OverheadComputing the Variable Overhead VariancesVariable manufacturing overhead rate varianceVMRV = (AH × AR) – (AH × SR) = $100,000 – (88,000 hours × $1.00 per hour) = $12,000 unfavorableComputing the Variable Overhead VariancesVariable manufacturing overhead efficiency varianceVMEV = (AH × SR) – (SH × SR) = $88,000 – (84,000 hours × $1.00 per hour) = $4,000 unfavorableComputing the Sum of All VariancesEnd of Appendix 10A
