PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

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Appendix 10A

Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System

10A-2

Learning Objective 4

(Appendix 10A)

Compute and interpret the fixed overhead budget and volume

variances.

10A-3

Budget variance

Fixed Overhead Budget Variance

Budgetvariance

Budgetedfixed

overhead

Actualfixed

overhead= –

ActualFixed

Overhead

FixedOverheadApplied

BudgetedFixed

Overhead

10A-4

Volumevariance

Fixed Overhead Volume Variance

Volumevariance

Fixedoverheadapplied to

work in process

Budgetedfixed

overhead= –

ActualFixed

Overhead

FixedOverheadApplied

BudgetedFixed

Overhead

10A-5

FPOHR = Fixed portion of the predetermined overhead rate DH = Denominator hours SH = Standard hours allowed for actual output

SH × FPOHRDH × FPOHR

Fixed Overhead Volume Variance

Volume variance FPOHR × (DH – SH)=

ActualFixed

Overhead

FixedOverheadApplied

BudgetedFixed

Overhead

Volumevariance

10A-6

Computing Fixed Overhead Variances

Budgeted production 30,000 units Standard machine-hours per unit 3 hours Budgeted machine-hours 90,000 hours Actual production 28,000 units Standard machine-hours allowed for the actual production 84,000 hours Actual machine-hours 88,000 hours

Production and Machine-Hour DataColaCo

10A-7

Computing Fixed Overhead Variances

Budgeted variable manufacturing overhead 90,000$ Budgeted fixed manufacturing overhead 270,000 Total budgeted manufacturing overhead 360,000$

Actual variable manufacturing overhead 100,000$ Actual fixed manufacturing overhead 280,000 Total actual manufacturing overhead 380,000$

ColaCoCost Data

10A-8

Predetermined Overhead Rates

Predetermined overhead rate

Estimated total manufacturing overhead costEstimated total amount of the allocation base

=

Predetermined overhead rate

$360,00090,000 Machine-hours

=

Predetermined overhead rate

= $4.00 per machine-hour

10A-9

Predetermined Overhead Rates

Fixed component of thepredetermined overhead rate

$270,00090,000 Machine-hours

=

Fixed component of thepredetermined overhead rate

= $3.00 per machine-hour

10A-10

Applying Manufacturing Overhead

Overheadapplied

Predetermined overhead rate

Standard hours allowedfor the actual output

= ×

Overheadapplied

$4.00 permachine-hour

84,000 machine-hours= ×

Overheadapplied

$336,000=

10A-11

Computing the Budget Variance

Budgetvariance

Budgetedfixed

overhead

Actualfixed

overhead= –

Budgetvariance

= $280,000 – $270,000

Budgetvariance

= $10,000 Unfavorable

10A-12

Computing the Volume Variance

Volumevariance

Fixedoverheadapplied to

work in process

Budgetedfixed

overhead= –

Volumevariance

= $18,000 Unfavorable

Volumevariance

= $270,000 –$3.00 per

machine-hour( ×$84,000

machine-hours)

10A-13

Computing the Volume Variance

FPOHR = Fixed portion of the predetermined overhead rate DH = Denominator hours SH = Standard hours allowed for actual output

Volume variance FPOHR × (DH – SH)=

Volumevariance

=$3.00 per

machine-hour (×90,000

mach-hours–

84,000mach-hours)

Volumevariance

= 18,000 Unfavorable

10A-14

A Pictorial View of the VariancesFixed Overhead

Applied toWork in Process

ActualFixed

Overhead

BudgetedFixed

Overhead

252,000270,000280,000

Total variance, $28,000 unfavorable

Budget variance,$10,000 unfavorable

Volume variance,$18,000 unfavorable

10A-15

Fixed 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.

10A-16

Graphic Analysis of FixedOverhead Variances

Machine-hours (000)

Budget$270,000

90

Denominatorhours

00

Fixed overhead applied at

$3.00 per standard hour

10A-17

Graphic Analysis of FixedOverhead Variances

Actual$280,000

Machine-hours (000)

Budget$270,000

90

Denominatorhours

00

Fixed overhead applied at

$3.00 per standard hour

Budget Variance 10,000 U{

10A-18

Applied$252,000

Machine-hours (000)

Budget$270,000

Graphic Analysis of Fixed Overhead Variances

908400

Standardhours

Fixed overhead applied at

$3.00 per standard hour

Denominatorhours

Budget Variance 10,000 U

Volume Variance 18,000 U

{{

Actual$280,000

10A-19

Reconciling Overhead Variances and Underapplied or Overapplied Overhead

In a standardIn a standardcost system:cost system:

Favorablevariances are equivalentto overapplied overhead.

The sum of the overhead variancesequals the under- or overapplied

overhead cost for the period.

10A-20

Predetermined overhead rate (a) 4.00$ per machine-hour Standard hours allowed for the actual output (b) 84,000 machine hours Manufacturing overhead applied (a) × (b) 336,000$ Actual manufacturing overhead 380,000$ Manufacturing overhead underapplied or overapplied 44,000$ underapplied

Computation of Underapplied OverheadColaCo

Reconciling Overhead Variances and Underapplied or Overapplied Overhead

10A-21

Computing the Variable Overhead Variances

Variable manufacturing overhead rate varianceVMRV = (AH × AR) – (AH × SR) = $100,000 – (88,000 hours × $1.00 per hour) = $12,000 unfavorable

10A-22

Computing the Variable Overhead Variances

Variable manufacturing overhead efficiency varianceVMEV = (AH × SR) – (SH × SR) = $88,000 – (84,000 hours × $1.00 per hour) = $4,000 unfavorable

10A-23

Computing the Sum of All Variances

Variable overhead rate variance 12,000$ U Variable overhead efficiency variance 4,000 U Fixed overhead budget variance 10,000 U Fixed overhead volume variance 18,000 U Total of the overhead variances 44,000$ U

Computing the Sum of All variancesColaCo

10A-24

End of Appendix 10A