Chapter 46

Manufacturing Overhead Variances


 

Unlike material and labor variances, we cannot break into price and quantity components. We break overhead standards into variable and fixed instead.

 

A three column format is used. The variances are differences between the totals of each column.

 

 

Each column will contain two rows--one for variable and one for fixed amounts. Instead of multiplying down, we will add the amounts in each of the three columns. The total of the Actual column is compared to the total of the Flexible Budget column. The difference is labeled Overhead Controllable Variance. The total of the Flexible Budget column is compared to the total of Applied column and the difference is labeled as Overhead Volume Variance. In each comparison, if the left total exceeds the right total, the variance will be unfavorable. If the left total is less than the right total, the variance will be favorable.

 

To determine the total overhead variance, combine the overhead controllable variance with the overhead volume variance.

 

 

Overhead Rates

Recall that overhead costs are applied to products and services using a predetermined overhead rate (POHR). We will use two overhead rates for overhead variances so that it is easier to identify the cause of an overhead variance.

 

 

Applying Overhead

Instead of applying one rate as goods are produced, we apply each of the separate rates as each unit is produced.

Applied Overhead  =  [FOHR    Actual Units Produced]

+

      [VOHR    Actual Units Produced

The VOH amount for the flexible budget column is the same as the variable overhead applied because both are based on actual activity and the rate is the same per unit. Recall that fixed costs are the same in total no matter how many units are produced. As a result, this fixed amount is the amount allowed no matter what level of units.

 

Causes of Overhead Variances

The controllable overhead variance exists because more or less overhead costs were incurred than the amount allowed. The volume variance exists because the volume level at which the company operated is different the amount budgeted.

 

 

Responsibility for Material Variances

Who is responsible for the overhead volume variance?  No one in particular has caused this variance. The estimated units in the budget differs from the actual units.

Whose problem is it when an overhead controllable variance exists? The production supervisor is responsible for making sure that overhead costs are within budget guidelines, both fixed and variable.

 

 

Example Problem

Bateh Company produces hot sauce. It uses units as the cost driver for overhead. The following information was provided concerning its standard cost system for 2006:

Standard Data

 

Actual Data

Material

1/8 lb. @ $7.50 per lb.

 

Produced

4,400

Labor

24 mins. @ $12 per hr.

Materials purchased

600 lbs. for $4,440

Budgeted fixed overhead

$28,350

Materials used

556 pounds

Budgeted variable overhead

$4.50 per unit

Labor worked

1,610 hours totaling $19,481

Budgeted production

4,500

Actual overhead

Fixed $20,000; Variable $28,400

 

Calculate all three overhead variances.

 

Solution

Set up the three column matrix and write the actual fixed and actual variable overhead costs on the respective lines under the Actual column. The problem gives these amounts as $28,400 and $20,000.

 

 

Actual

 

Flexible

 

Applied

 

VOH

28,400

     

      

FOH

 20,000

 

    

       

     

 

Let's look at the Applied column next. We need to determine the predetermined overhead rates for variable and fixed since neither are given. The formula to determine the variable overhead predetermined rate is:

 

        Variable POHR = Estimated Variable Manufacturing Overhead Estimated Units

 

        Fixed POHR = Estimated Fixed Manufacturing Overhead Estimated Units

 

The variable overhead rate is given at $4.50. If we wanted to know the total estimated variable overhead, we could work backwards using the 4,500 units and the rate and arrive at $19,800. For the fixed POHR, we are given the estimated overhead. The estimated, or budgeted units is 4,500. The fixed POHR is $6.30 per unit.

 

VOH rate = 

 $20,250

=

 $ 4.50

     4,500

   

FOH rate = 

 $28,350

=

    6.30

     4,500

Predetermined OH rate =

 

 $10.80

 

Each of these is applied separately under the Applied column:

       

Applied Fixed Overhead = [FOHR Actual Units Produced] = [$6.30 * 4,400] = $27,720

 

 Applied Variable Overhead = [VOHR    Actual Units Produced] = [$4.50 * 4,400] = $19,800

 

             Total Applied Overhead = $27,720 + $19,800 = $47,520

 

These amounts go into the last column on the fixed and variable cost lines, respectively.

 

 

Actual

 

Flexible

 

Applied

 

VOH

28,400

 

 

 

   19,800

 

      

FOH

 20,000

 

        

 

 

   27,720

 

 

     

 

The flexible budget amount amount for variable is the same as the amount applied. This will always be the case when units are the activity. Because fixed costs are the same in total regardless of how many units are produced, the fixed overhead allowed in the flexible budge column is $28,350. After placing these amounts in the center column, we add each column and write the total below the underline for each of the four columns.

 

 

Actual

 

Flexible

 

Applied

 

VOH

28,400

 

         19,800

 

   19,800

 

      

FOH

 20,000

 

         28,350

 

   27,720

 

        48,400

 

         48,150

 

   47,520

 

 

Take the difference between the first and second columns to get the overhead controllable variance. Since the left total is greater than the right total, the variance is unfavorable. Take the difference between the middle and last columns to get the overhead volume variance. Since the left total is greater than the right total, the variance is unfavorable.

 

 

Actual

 

Flexible

 

Applied

 

VOH

28,400

 

         19,800

 

   19,800

 

      

FOH

 20,000

 

         28,350

 

   27,720

 

        48,400

 

         48,150

 

   47,520

 

 

 OH Controllable 

 

 OH Volume 

  

 

$250 U

  

 $630

 

 
  Total OH Variance  
   $880 U   

 

The total variance is determined by combining the two overhead variances together. Because both variances are unfavorable,  the two amounts are added creating a total unfavorable variance of $880.

 

Should the Overhead controllable and the overhead volume variances be investigated if the company has a 2% materiality threshold? You first need to calculate how much 2% is. The middle column is the total flexible budget amount allowed and is used as the budget amount for this calculation.

 

            2% x $48,150 = $963

Because neither variance exceeds the $963 amount, neither should be investigated.

 

Who is responsible for these variances? The production supervisor is responsible for controllable overhead variable. Non one is responsible for the volume variance because we know why it exits--the company operated at a different level of activity than budgeted. .