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the formula is Standard hrs for actual output x OAR – budgeted o/h= fixed o/h vol var.
why do we absorb o/h based on standard hrs and why not based on actual hrs .cause when we were doing absorption costing we are absorbing overheads based on actual hrs not on standard hrs
or we absorb o/h on actual hrs on actual budget, since we are calculation variances between the original budget and actual, so the formula is like this.
ultimately the total fixed o/h variance will gonna show difference between actual o/h incurred and overhead absorbed based on actual labour hrs and not standard hrs.Is it right?
basically i’m confused with these only fixed o/h variance.
we learned in absorption costing that we apply o/h based on actual hrs worked x OAR , and if the overhead absorbed is different that actual o/h incurred that leads to over/under absorption.
but here in variance analysis total fixed overhead variance show over/under absorption as a fixed o/h difference between flexed and actual budget why is it so? and also flex budget absorbs OAR based on standard hrs and not on actual hrs.
plz clear it sir,is it something different.
But I explain all of this in detail in my free lectures on variances!!!
i completely understand that when we produce more unit we absorb more overheads and so u flexed the fixed o/h.
the question is when i solve some question on bpp kit related to find out whether its over /under absobed then to calculate absorbed o/h we used (actual hrs for production x OAR)
but here we are not doing like that instead of actual hrs we are doing (standard hrs for actual output x OAR). its okay but the problem is we are saying the difference between flex and actual overhead is the under/over absorbed.
isn’t that under/over absorbed should be the difference between actual overhead incurred and overhead absorbed based on actual hrs.
this is my question.i have exam on upcoming week so plz help me with this.
It depends on whether you are being asked a question on the over/under absorption of overheads, or a question on variance analysis.
The over/under absorption is the difference between the actual overheads and the amount absorbed. (Which is the same as the total variance when doing variance analysis).
For variance analysis, we then separate out the volume variance (which is the difference between the amount that should be absorbed (the flexed amount) and the budgeted amount; and the expenditure variance, which is the difference between the actual total and the budget total.
for example a question in bpp book
budgeted actual
labour hrs 9000 9900d. mat 55000 53900
d.wages 34000 35500
overheads 63000 61500
units produced 120000 122970
calculate the amount of under/over absorbed overheadsso we find out OAR= budgeted o/h / budgeted labour hrs = 63000/9000= $ 7 / labour hr
absorbed overhead is actual labour hrs x oar = 9900 x 7 = 69300
actual o/h 61500
absorbed o/h 69300so its over absorbed by 7800 (solved as per bpp)
we aren’t using standard hrs here to calculate absorbed o/h
other wise it will be like standard hrs for each unit is 9000/120000=0.075
then standard hrs for actual output 122970 = 122970x 0.075=9222.75this is where i’m getting confused
can u plz explain it again i didn’t get ur answer,
do u mean to say in variance analysis the over or under absorbed will be different than the question where we are being asked about to cal over /under absorption
cause in variance we use standard hrs but in question about calculating over/under absorption we use actual hrs
In over or under absorption questions, then it depends whether the overheads are being absorbed on a per unit basis or on a per hour basis (as in the examples in my lecture on absorption costing).
In variance questions, it is always absorbed on a per unit basis, and the volume variance is the difference between the amount absorbed and the budgeted amount. Any difference between the actual and budgeted amounts is the expenditure variance.
yes i got it , in variance if o/h absorbed based on units then its actual units x oar ,only in case of labour hrs we use standard hrs
so its better to keep this thing in mind in exam ,
that when any question ask about calculating under/over absorption then we will use actual hrs
but in variance analysis while flexing the budget use standard hrs for actual output x oar
and the difference between actual and flexed budget is the total fixed o/h variance ie; under/over absorbed
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