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A has prepared the following standard cost information for one unit of Product X.
Direct Materials 4kg @ $10/kg $40.00
Direct Labour 2 hours @ $4/hour $8.00
Fixed overheads 3 hours @ $2.50 $7.50The fixed overheads are based on a budgeted expenditure of $75,000 and budgeted activity of 30,000 hours.
Actual results for the period were recorded as follows.
Production 9,000 units
Materials(33,600kg) $336,000
Labour(16,500 hours) $68,500
Fixed Overheads $70,000Question. The total fixed production overhead variance is:
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Hello Sir:)
it’s costing me hours…
I know the answer is $2,500(A) from the actual total cost being $70,000 and standard cost for actual production(9,000 * $7.5) being $67,500.
However, having tried to explain it from the expenditure and volume variances, I just can’t match the figures.
The expenditure variance(budgeted $75,000 – actual $70,000) is $5,000(F).
The volume efficiency variance{(actual hours worked 16,500 – standard hours for production 18,000) * rate 2.5} is $3,750(F)
The volume capacity variance{(budgeted hour 30,000 – actual hours worked 16,500) * rate 2.5} is $33,750(A)
Then the total becomes $25,000(A)…which is totally different from what I did up there..
what did I do wrong? plz help me…
I do not know where you got this question from, but it is a terribly poor question.
The problem is that fixed overheads are being absorbed (according to the cost card) at 3 hours per unit. (This is not sensible – in the exam it will be absorbed on a labour hour basis).
Because of this, it is impossible to calculate the efficiency and capacity variances – we would need to know how many hours of fixed overheads were actually used. Since it is not the same as labour hours we are stuck! 🙂
All you can calculate is the volume variance in total which is 9000 – 10000 = 1000 units x $7.50 (std cost per unit) = $7,500 (A).
As you have written, the expenditure variance is 5,000 (F).
So the total fixed overhead variance is $2,500 (A).
For the reasons I have written above, it is not possible to analyse the volume variance into capacity and efficiency.
Thanks Mr Moffat:)
One thing though..
You’re saying is that even if the actual hours worked is 16,500, there isn’t anything about hours for fixed overhead absorption, which makes impossible to calculate. isn’t it right?
So (from the cost card) although the fixed overhead is absorbed at the 3 hours @ $2.50, it has nothing to do with actual labour hour? Because it didn’t say that the fixed overhead is absorbed on a labour hour basis?
Thats true.
In the exam the fixed overheads will certainly be absorbed on labour hours (and so it would be 2 hours on the cost card, not 3).
Because in this question the hours are different, it means they are not being absorbed on labour hours (maybe for example it is machine hours) and so we cannot analyse the volume variance unless we were told how many of these ‘other’ hours (for example machine hours) were actually worked.
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