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  3. Dear Teacher,

    in the chapter of Cost behaviour earlier, total fixed cost didn’t change according to production levels while fixed cost per unit would decrease when we produce more units. however in your lecture you said the more units we made, the more fixed O/H we spent (in example 2: from $130.500 to $ 134.074). is there any misunderstand here?

    and you also explained that ” produced more was good is equal Favarouable”. it means that the more unit we made, the more sale we got and therefore the more profit we generate. Am i correct? if it is right. we will spend more inventory cost. this lead to overspent, so it became adverse, not Favarouble. Am i right?

    Could you please clarify these more clear?

    Thank you Sir

    Could you

    • Fixed overheads should indeed stay fixed in total. However if we are using absorption costing (as we are in this example – marginal costing variance analysis is dealt with later) then this effectively treats the fixed overheads as though they are variable. (I explain this in the first of the lectures on variance analysis). That is why we need to ‘correct’ it by having the fixed overhead volume variance.

      The reason producing more results in a favourable volume variance is that absorption costing will have charged fixed overheads per unit for every unit produced. If you produce more then more fixed overheads will have been charged. However since total fixed overheads should not change with production, producing more will mean we have charged more than we should have done against the profit. To ‘correct’ it we effectively reduce the amount that has been charged, and reducing the expense increased the profit – hence favourable. (It has nothing to do with how many of the production are actually sold)

    • Thank you for your explaination. however I didn’t get it clear. If you have another explaination is easier to understand please let me know.

      maybe I need to listen your lecture again to get it more

      Thank you very much Sir

      • It is hard to type in words, but I do explain in the lecture. (Make sure you listen to all of the variance lectures because it is in the first one that I explain why I am flexing the fixed overheads.)

    • Standard margin is standard contribution. It is not relevant for this example because it is absorption costing and we use standard profit when calculating the sales volume variance. It is when using marginal costing that we use the standard contribution to calculate the sales volume variance.

      • In kaplan where they have written the formulae of Sales volume Variance, they used standard margin in the following way:

        ( Actual quantity sold – Budget quantity sold) × Standard margin

        And down below they mentioned that the standard margin equals the standard contribution per unit ( marginal costing), or the standard profit per unit ( absorption costing).

        So what I actually wanted to know was that is standard margin a general term used for both of them or its only used for contribution. Because the idea I get from above is that it’s a general term. This is the basic reason I asked you about standard margin.

  5. Dear Sir,
    I’m just having some trouble wrapping my head around doing the the Fixed Overheads in this way. Surely the logic of the Flexed Budget is that we’re using the figures we would have come up with at the start of the year, had we known our actual production and sales figures from the beginning. But had we known from the beginning that we would produce 8900 units, we would expect to need more labour hours, and so we would never have used €15 as the absorption rate. So I guess my question would be, why do this extra variance analysis instead of just calculating a new absorption rate? Many thanks for these wonderful lectures.
    -Naoise

    • Variance analysis is normally done monthly. Obviously it would be a miracle if everything went according to budget each month – some months we will use more labour and some months we will use less labour.
      However, it would be silly to keep changing the absorption rate every month (which would then change the standard costs and therefore the inventory value every month).

      We assume (certainly for Paper F5) that the estimates used for calculating the absorption rate are OK for the year as a whole. It just means that some months we will have a variance one way, and some months the other way.

      Hope that makes sense 🙂

  6. Dear Sir,
    In this chapter, when you are making the operating statements, you divide the fixed overheads variances into expenditure variance, capacity variance and efficiency variance. Now when I review this lecture again, I could get the capacity variance $1800(F). Can you help me?
    Thank you very much for your help in advance !!!

      • For the capacity variance you take the difference between the actual hours worked and the originally budgeted hours. You multiply the difference by the standard fixed overheads per hour.

        If actual hours are more than budgeted hours then the variance is favourable; if less then it is adverse.

      • Yep me too
        I got the capacity variance as 1800 (A)
        How did 1800 (f) come
        It should be 1800 (A)
        Because
        Act hrs worked 44100
        Original budget hrs 43500
        So in this there is 600 hrs of adverse ..
        So… 600 × 3 = 1800(A).. PLEASE help me out sir im confused

      • The capacity variance is favourable.

        They actually worked more hours, therefore the actual fixed overheads per hour are lower the budget and therefore it is favourable.

        Do read my previous reply above, and do watch the lecture again because I do explain in the lecture.

  7. In relation to the controversy on the variation of the fixed overheads as against the fixed budgeted which we know it ought not to change as a fixed overheads, the can I say it is a semi-fixed overheads and not fixed overheads? since the unit cost is fixed ($3000/200units=$15) but the total cost changed?

    Thus in the short run it was fixed cost in nature (budgeted) but in the long run fixed costs normally becomes semi-fixed

  8. Hi,

    Can you please explain this question??
    A company has recorded the following variances for a period:
    $ Sales volume variance – 10,000 – adverse
    Sales price variance – 5,000 – favourable
    Total cost variance – 12,000 – adverse
    Standard profit on actual sales for the period was $120,000.

    What was the fixed budget profit for the period?

    $130,000

    $137,000

    $103,000

    $110,000

    Thanks 🙂

    • Budget profit , if sales volume would be favorable, then the standard(flexed budget) profit increases. ( it would be badgered profit= £110,000. Plus sales volume £10,000 favourable, then = £120,000( standard profit= flexed b). But, here you wrote Sales volume was £10,000 adverse. It means sold actually less units than badgered. Therefore, your original badger was £130,000 + Sales volume of £10,000 Adverse= £ 120,000 standard profit(flexed). So, orig. Bags. £130,000… I suggest, have a relook on F2, variance analysis. Look at operating statement. My lovely teacher, John Mofatt, have explained in a very easy way as he always does it. Hope it is correct.

      • Something else, sales price and costs variances, these data will be used after the flexed profit in order to arrive to actual profit. That’s all.

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