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At the moment i am strucked at the variances solution provided in the kaplan kit.
The overhead absorption rate is $27
Budgeted hrs are 5562
Actual hrs are 6861
As we know the overhead variance is divided into the expenditure,capacity and the efficiency variances.
The capacity variance=27(5562-6861)=$35073 F
How come it,s favorable? It should be adverse because the actual hours were greater than the budgeted hrs so we absorbed more right?
I think they mistakenly put F instead of A but if thats true then it is not reconciling with the overhead variance of $2426 A.
Confused fella here 🙂The variance is favourable.
The reason is that they managed to get more hours of labour than they were expecting to get, which means that the absorption rate (fixed overheads per hour) would be lower, which on its own would result in more profit.
Fixed overheads variances are unlikely in Paper PM (because they were examined in Paper MA (was F2)) but if you are still unsure then do watch my free Paper MA lectures on fixed overhead variances.
@johnmoffat said:
The variance is favourable.The reason is that they managed to get more hours of labour than they were expecting to get, which means that the absorption rate (fixed overheads per hour) would be lower, which on its own would result in more profit.
Fixed overheads variances are unlikely in Paper PM (because they were examined in Paper MA (was F2)) but if you are still unsure then do watch my free Paper MA lectures on fixed overhead variances.
Got it 🙂 Thanks.I passed F2 a while ago so i forgot some basics.
Actually this question was part of a learning curve question and how the learning curve is affecting the variances .I think alone definitely this shall not be asked in PM but it can be asked along with learning curve question.
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