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24.5 Mortensen manufactures wooden toys. It uses a standard costing system to control costs. The cutting
department cuts the shapes which are sold as toy animals.Hardwood: 16.00
Direct labour 30 minutes at $9 per hour: 4.50
Fixed overhead 30 minutes at $4 per direct labour hour: 2.00
Standard cost per unit: 22.50Fixed overhead absorption rates are based upon monthly fixed overheads of $26,000 and a budgeted
monthly output of 13,000 sets of animals.In the most recent month 14,000 sets of animals were made. 8,000 direct labour hours were worked
and paid at $9.25 per hour. Actual fixed overheads were $23,000 for the month.Question:
(Task 2)Match the possible explanations of the cause of variances to the variance.
Volume variance
Efficiency variance
Expenditure variance
Capacity varianceLabour productivity was lower than expected Labour productivity was higher than expected Over-absorption of fixed overheads
Under-absorption of fixed overheads
Fixed overhead expenditure was higher than
expected
Fixed overhead expenditure was lower than expected
Labour worked more hours than expected
Labour worked fewer hours than expected(4 marks)
Hello
The above question is from the BPP revision kit in the section of multi task qns. If we check the answer to this particular task, it says that that the fixed overhead volume variance (which is favorable) can be caused by an over-absorption of overheads.Can you explain how? Because it calculates the difference between absorbed overheads and budgeted overheads (and not the actual overheads).
Looking forward to your response, thank you
The volume variance is indeed the difference between the absorbed overheads and the budgeted overheads, and this occurs because the overheads have been over or under absorbed. (The difference between the actual and budgeted overheads is the expenditure variance).
I do suggest that you watch my free lectures on fixed overheads variances where I do explain this.
Ok.
In the case of the qn I posted above, does this mean that if overheads were NOT over-absorbed (maybe because the actual units produced were the same as budget…) then there would not be any difference between the overhead absorbed and the overhead budgeted therefore the favorable volume variance wouldn’t be there?
Please help me confirm that. The qn was confusing because it seemed that the over-/under-absorption of overheads would be what causes the fixed overhead total variance and not the volume variance
Your first paragraph is correct.
The volume variance is part of the analysis of the total variance and so any volume variance is part of the reason for the total variance. As I explain in my free lectures, the total variance is made up of the volume variance together with the expenditure variance.
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