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Hello,
Can you please explain why the variable overhead expenditure variance had been calculated this way in the following question? I will also post the solution along with it directly from the exam kit (Kaplan).My specific doubt is where they took: (Standard VOAR per unit x actual quantity) to calculate the budgeted variable overheads
While, in the study text it is explained that “ if variable overheads vary with production volume rather than direct labour hours it is not possible to calculate the sub-variances of expenditure and efficiency. In such situations, only the variable overhead total variance can be calculated using the standard variable overhead cost per unit”
Question:
The following details relate to product T, which has a selling price of $44.00:Direct materials 15.00
Direct labour (3 hours) 12.00
Variable overhead 6.00
Fixed overhead 4.00
–––––– 37.00 ––––––During April 20X6, the actual production of T was 800 units, which was 100 units fewer than budgeted. The budget shows an annual production target of 10,800, with fixed costs accruing at a constant rate throughout the year. Actual overhead expenditure totalled $8,500 for April 20X6.
Overheads are absorbed on the basis of units produced.What were the overhead variances for April 20X6?
The correct answer was 100 A (for the expenditure variance) and 400 A for the (efficiency variance).
Solution:
Expenditure variance:
Monthly budgeted production (10,800/12) = 900 units
Monthly budgeted expenditure
(Flexed budget)Fixed costs (900 × $4)
Variable costs (800 × $6)
Total expected expenditure 8,400
Actual expenditure 8,500
––––––
Expenditure variance
100 (A)
––––––
Volume variance:This only applies to fixed overhead costs:
.
Volume variance in units (900 – 800) 100 units (A)
Standard fixed overhead cost per unit $4Fixed overhead volume variance 100 units x $4
$400 (A)Why is an expenditure variance even calculated for variable overheads when what was explained in the study text about it was quite different. I will really appreciate your explanation for that part
Thank you in advance
The expenditure variance is looking at whether we paid more of less than the standard variable cost for the actual number of units produced (obviously if more or less units are produced than budgeted we will be automatically spending more or less in total).
I do suggest that you watch my free lectures on this. The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well. If you are watching the lectures you do not really need the text book (it is the Revision/Exam Kit that is vital because practice on exam standard questions is essential after having studied all of the topics).
Ok, what you explained above applies only to variable overhead expenditure variance right?
Because in the question I posted previously, for fixed overheads they were looking at whether or not we paid more or less than the standard cost for BUDGETED units (not the actual as it was for variable overheads)
Please re check that and kindly help me understand the reason for the difference in the 2 calculations
Fixed overheads (by definition) should stay the same in total regardless of the level of production. Variable costs however should vary with the level of production.
Again, have you watched my free lectures on this?
Ok I got it, it’s just that with what was explained in the study text (Kaplan) about the formulae used for calculating the expenditure variance, the way in which the question was answered was not clear. Thank you very much
Sure I will try to check out your lecture
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