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Manufacturing Overhead Variances

Managerial Accounting

Prepared by Diane TannerUniversity of North Florida

Chapter 46

Flexible Budget Overhead

• Represents the overhead allowed at the number of units produced

• Variable overhead– Variable cost per unit × number of actual units

• Fixed overhead– Total fixed overhead– Same at all levels of activity

Applied Overhead

Overhead costs are applied to products and services using a predetermined overhead rate (POHR)

Applied Overhead = [FOHR × Actual Units Produced]+

[VOHR × Actual Units Produced]

Estimated VOHVariable Overhead rate (VOHR) = Estimated Units to Produce

Estimated FOHFixed Overhead rate (FOHR) = Estimated Units to Produce

Overhead Variances

Overhead Controllable Variance

Overhead Volume Variance

Total Overhead Variance

Actual VOH

VOH rate × Actual units

Actual FOH

Budgeted FOH

Flexible BudgetActual Applied

Variable

Fixed

+ ++

VOH rate × Actual units

FOH rate × Actual units

$Total $Total $Total

DR, Inc. provided the following information for overhead: Actual variable overhead = $14,500

Actual fixed overhead = $8,200Budgeted variable overhead = $14,000 per unit

Budgeted fixed overhead = $4 per unitBudgeted units produced = 2,000; Actual units produced = 2,040DR applies overhead based on the number of units produced.

Overhead Variances Example

Calculate the overhead rates:

Estimated variable overheadVariable overhead rate =

Estimated units to produce =$14,000

2,000 =

$8,000 Estimated fixed overheadFixed overhead rate =

Estimated units to produce =

2,000 = $4.00 per unit

$7.00 per unit

DR, Inc. provided the following information for overhead: Actual Overhead: Variable = $14,500; Fixed = $8,200

Budgeted variable overhead = $14,000 per unitBudgeted fixed overhead = $4 per unit

Budgeted units produced = 2,000; Actual units produced = 2,040DR applies overhead based on the number of units produced.

Overhead Variances Example

= $22,700 = $22,280 = $22,440

Overhead controllable variance$420 unfavorable

Overhead volume variance$160 favorable

Total Overhead Variance = $260 unfavorable

Actual Flexible Applied

FOH

VOH $14,500

$8,200

$7 * 2,040 = $14,280 $7 * 2,040 = $14,280

$4 * 2,040 = $8,160$8,000

Manufacturing Overhead Variances

• Controllable variance– Who is responsible?

• Production Supervisor– Managers are expected to control costs (and for some,

revenues) to avoid substantial differences from budget amounts

• Volume variance– Who is responsible?

• No one– Exists because the volume of production/sales is

less/more than budgeted

Because we know why this variance exists.

Behavioral Considerations

Standard costs and variance analysis can• Provide very useful control

measures • Aid in performance evaluations• Cause dysfunctional behavior

among employees and managers

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The End