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Hi
I am having trouble in calculating the variable and fixed overhead variance for the ‘Dance’ of the below problem.
BUDGET DATA FOR DANCE
Production budget standards for: 2100 units
Direct materials (fabric)
1.5 metres $7.50 per metre
Direct labour 1 hour $18.50 per hour
Variable overhead $2.80 per hour
Fixed overhead $4.75 per hourOverhead costs for Dance have been determined as follows: An overhead budget is determined for a particular period for the Shoe Section as a whole. This cost is shared across the three product lines for budgeting and variance calculation purposes in proportion to the budgeted direct labour hours. The fixed overhead rate is calculated taking standard (budget) data for all three lines of the product into account .
Budgeted fixed overhead for the period is $21,000.00
The budgeted fixed overhead for Dance is $9,975.00
Based on the production budget for the total number of units:Number of units DL hour per unit
Dance 2100 1
Run. 1200. 0.5
Walk 750. 2ACTUAL DATA
There is no opening or closing WIP, and no inventory of direct materials on hand at the beginning of the period.
Standard costs in Finished Goods have not changed from last period, opening inventory is 500 units..Number of units produced in the period is 2200
Units sold in the period 1800 at $75.00 per unit
Purchases of direct materials for cash 3500 metres at $8.20 per metre
Direct materials used in the period 3400 metres
Direct labour hours worked in production 2400 DL hours at $20.00 per hour
Actual variable overhead $3.00 per DL hour
Dance share of actual fixed overhead $11,500.00 *This is how I have worked the calculations
VARIABLE OVERHEAD
Variable Spending
ACT QTY x ACT PRICE – ACT QTY x STD PRICE
=(2,200x $3.00) – ( 2,200 x $ 2.80)
=$6,600 – $6,160
=440UVariable Efficiency
ACT QTY x STD PRICE – STD QTY x STD PRICE
=(2,200 x $ 2.80) – ( 2,100 x $2.80)
= $6,160- $5,880
=$280UFIXED OVERHEAD
Fixed SpendingACT QTY x ACT PRICE – ACT QTY x STD PRICE
= $11,500 – (2,200 x $4.75 )
=$11,500 – $10,450
= $1,050UFixed Volume
ACT QTY x STD PRICE – STD QTY x STD PRICE
(2,200 x $4.75 ) – (2,100 x $4.75)
=$10,450 -$9,975
=475U
Can you please let me know where I am going wrong. ThanksVariable overheads first:
Expenditure variance (we do not call it spending variance):
It is actual hours worked (not actual quantity) x actual cost per hour – actual hours worked x std cost per hour.
Efficiency variance:
It is actual hours (not quantity) x standard cost per hour – standard hours for actual production x standard cost per hour.
Now fixed overheads:
Expenditure variance (we do not call it spending variance)
This is actual total fixed overheads – budget total fixed overheads
Volume variance
Your formula is correct except that you should use standard cost per unit (you have used standard cost per hour).
It really would be a good idea for you to watch my lecture on here on variances.
(Also, I do not know where you got the question from, but remember that in the exam they are only 2 mark questions and so you could only be asked a short extract – not such a long question 🙂 )
Hi John,
So the calculations would be..
Variable Overheads
Expenditure variance
(2400x$3) – (2400x$2.80)
=7200-6720
=480UEfficiency variance
(2400x$2.80)-(2100x$2.80)
=6720-5880
=840UFixed Overheads
Expenditure variance
$11500-$9975
=$1525Volume variance
(2,200 x $4.75 ) – (2,100 x $4.75*)
=$10,450 -$9,975
=475UAs it takes 1hr for a dance shoe unit to be made wouldn’t the cost per unit be $4.75.
Thanks!
Hi John,
I see where I have went wrong, I should be multiplying by actual hours of production not budgeted hours.
Also with volume variance is it is still 475 but favorable because there was more actual production units than budgeted units.
Are these assumptions correct?PS. Your lectures are great; I finally get it….I think.
Your calculations are now all correct, except for one of them.
For the variable overhead efficiency variance, it should be:
(actual hours x standard cost per hour) – (std hours for actual production x std cost per hour)
The actual hours are 2,400, the std cost per hour is 2.80 (so you have those correct).
However the std hours for actual production is wrong. They actually produced 2,200 and the std time is 1 hour, and so the std hours for actual production is 2,200 hours (not 2,100 as you have written).Hi John
A few questions about the above problem.
Non-manufacturing costs
Budgeted and actual selling and administrative costs related to Dance are as follows:
Variable costs per unit are $1.00
Fixed costs for the period total is $2,000.00If the period costs for the period are as above how does variable period costs get calculated, I worked it out as 2100 x $1.00 = 2100 under standard absorption costing and $2200 x $1.00 = $2200 under normal absorption costing.
If the open inventory is 500 units does this get included in Cost of Goods Sold (COGS) and does it get multiplied by the COGS/unit; so 500 x $37.08 = 18,540. Does the 500 get included for both Standard and Normal Costing.
If the variances get written off to COGS does this get included in the COGS total amount on the income statement for both standard and normal costing?
Thanks.
Non-manufacturing costs are not absorbed – it is only manufacturing costs that are absorbed to get the production cost per unit (assuming we are using absorption costing).
As a result, the fixed costs will simply be $2,000, and the variable costs will be the number of units sold x $1 per unit. (The variable selling costs vary with units sold, not units produced).Cost of goods sold is always opening inventory + production – closing inventory.
In management accounting, we value inventories at standard cost (even if the actual costs during the period were different). The standard cost per unit here is $37.30 (11.25 + 18.50 + 2.80 + 4.75).
I do not know what you mean by ‘normal’ costing or by ‘the variances are written off’.
We can calculate the actual profit by using the actual revenue and actual costs (but valuing inventories at standard cost as above). The variances are simply explaining why the actual profit is different from the budgeted profit. We can produce a statement (an operating statement) starting with the budget profit, then listing all the variances, and this will result in the actual profit. However in Paper F2, you cannot be asked to produce this statement (and neither can you be asked to do a full question like the one above). In F2 you will be asked separate little questions, each one just asking for one or two of the variances.
Hi John,
With normal costing I meant how would the income statement look like if a firm was undertaking normal job costing.
Thanks
Job costing would usually be done at standard cost (we would usually need to estimate the cost in order to quote a price)
It is simply that we would need a separate cost card for each job.
In which case the actual profit will differ from the budget profit due to any variances.
Variances are always simply the difference between the actual costs and the standard (i.e. budgeted) costs. (The word ‘variance’ means difference)
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