CAAM3692 Overhead variances notes for learning and formulas regarding variance PDF

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the notes are about variances were students need to know about variances, their formulas and how to calculate them...

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OVERHEAD VARIANCES: The overhead variances show the difference between the standard overhead cost and the actual overhead cost. Standard variable overhead rate =

Budgeted variable overhead Normal volume

Variable overhead cost variances This variance can now be analysed into its ‘ price ’ and ‘ quantity ’ elements. The ‘ price ’ part is called the variable overhead expenditure (spending) variance and the ‘ quantity ’ part is called the variable overhead efficiency variance. The difference between the two arises due to the variation between the budgeted and actual quantity i.e. under or over absorption of overheads. The formula for the computation of this variance is as follows: Variable Overhead Cost Variance = Standard variable overhead absorbed – Actual Variable Overheads incurred. Based on rate per hour Standard hours for actual output x standard overhead rate per hour) - Actual Variable Overheads. Based on rate per unit (Actual output x standard overhead rate per unit) - Actual Variable Overheads. Variable overhead expenditure variance This variance indicates the difference between the standard variable overheads to be charged to the standard production and the actual variable overheads. The variable overhead expenditure variance reveals how much of the variable overhead total variance was caused by paying a different hourly rate of overhead for the hours worked. The formula for the computation is as follows: Variable Overhead Expenditure Variance = Standard Variable Overheads for Standard Production – Actual Variable Overheads.

Based on rate per hour Standard Variable Overheads absorption rate per hour x actual hours worked) - Actual Variable Overheads.

Based on rate per unit Standard Variable Overheads absorption rate per unit x actual hours worked) - Actual Variable Overheads. Variable overhead efficiency variance The variable overhead efficiency variance reveals how much of the variable overhead total variance was caused by using a different number of hours of labour, compared with the standard allowance for the production achieved. Its calculation is very similar to the calculation of the labour efficiency variance. It indicates the efficiency by comparing between the output actually achieved and the output that should have been achieved in the actual hours worked. [Standard Production] The formula for computation is given below: Variable Overheads Efficiency Variance= Standard Rate [Standard Quantity – Actual Quantity] Based on rate per hour (Standard hours for actual production-Actual hours) x Standard Variable Overhead absorption rate. Based on rate per unit (Std.Qty of actual output – Actual Qty for actual production) x Standard Variable Overhead absorption rate.

Fixed Overhead Variances: It represents the difference between actual fixed overhead incurred and standard cost of fixed overhead absorbed. It can also be referred to as the difference between actual fixed overhead incurred and standard fixed overhead for production. Standard fixed overhead rate =

Budgeted fixed overhead Normal volume

Fixed Overhead Cost Variance: This variance indicates the difference between the standard fixed overheads for actual production and the actual fixed overheads incurred. Actually this variance indicates the under/over absorbed fixed overheads. If the actual overheads incurred are more than the standard fixed overheads, it indicates the under absorption of fixed overheads and the variance is unfavourable. On the other hand, if the actual overheads incurred are less than the standard fixed overheads, it indicates the over absorption of fixed overheads and the variance is favourable. The following formula is used for computation of this variance.

Fixed Overhead Cost Variance = Standard Fixed Overheads for Actual Production – Actual Fixed Overheads. (Standard hrs for actual output x standard fixed overhead rate) – Actual Fixed Overheads Fixed Overhead Spending/Expenditure Variance: This variance indicates the difference between the budgeted fixed overheads and the actual fixed overhead expenses. If the actual fixed overheads are more than the budgeted fixed overheads, it is an adverse variance as it means overspending as compared to the budgeted amount. On the other hand, if the actual fixed overheads are less than the budgeted fixed overheads, it is a favourable variance. This variance is computed with the help of the following formula. Fixed Overhead Expenditure Variance: Budgeted Fixed Overheads – Actual Fixed Overheads  Budgeted fixed overhead < Actual fixed overhead U  Budgeted fixed overhead > Actual fixed overhead F Fixed Overheads Volume Variance: This variance indicates the under/over absorption of fixed overheads due to the difference in the budgeted quantity of production and actual quantity of production. If the actual quantity produced is more than the budgeted one, this variance will be favourable but it will indicate over absorption of fixed overheads. On the other hand, if the actual quantity produced is less than the budgeted one, it indicates adverse variance and there will be under absorption of overheads. The formula for computation of this variance is as shown below: Fixed Overhead Volume Variance = Standard Rate [Budgeted Quantity – Actual Quantity]  Budgeted Qty < Actual Qty F  Budgeted Qty > Actual Qty U Reconciliation Fixed Overhead Cost Variance = Expenditure Variance + Volume Variance...