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# Unit 8 Fixed Overheads

sloshed
Well-KnownRegistered Posts:

**100**
I am getting very confused on Standard, Budget and Actual when doing fixed overheads...... has anybody any tips :ohmy:

0

## Comments

2,034I recently tried (with partial success) to explain budget and actual overhead differences by reference to sleeping beauty. Irrespective of whether fairy stories work for you it is important to recognise

wheneach is used.Budgetedoverheads are our best estimate of the overhead costbeforethe period starts e.g 20 April for the May accounting periodStandardoverheads absorbed are not known untilafterthe period has finished e.g. 3rd June. It is found by multiplying the ACTUAL number of units produced by the standard hours per unit,a figure which we had set before the period started. This is multiplied by the standard overhead absorption rate per houranother figure which we had set before the period startedActualcost is simply the total overhead cost incurred.On April 20 I drew up my budget and identified that

- fixed overheads for May would be £25,000.
- Production for May would be 5,000 units
- Labour hours for May would be 10,000 (2 hours per unit)

This means we havea budgeted overhead absorption rate of £25,000/10,000 hrs = £2.50 per hour

and a standard time per unit of 10,000 hrs/5,000 units = 2 hrs per unit

Then May happened.

I then returned to my work on June 3rd and found

So our

budgetedoverhead was £25,000Our

standardoverhead was 4,800 units x 2hrs per unit x £2.50 per hour = £24,000And our

actualoverhead was £24,500This enables us to find the expenditure variance (difference between the budgeted cost and the actual cost) £500 favourable

And the volume variance (difference between the standard overhead absorbed and the budget) £1,000 adverse

If you wanted to find out how the volume variance can be attributed to efficiency and to capacity we would have to find the standard overhead absorbed for the actual hours worked (in our case 9,900 hrs x £2.50 per hour)

£24,750

So we have an efficiency variance of £750 adverse

the standard labour time was 4,800 units x 2hrs per unit = 9,600 hrs But we took 9,900 hrs (300 hrs more than the standard) So we were inefficient and 300 hrs x £2.50 = £750 adverseAnd a capacity variance of £250 adverse

the bugeted hours were 10,000 but we only worked for 9,900 so capacity was 100 less than budget (at £2.50 per hour) £250 adverse[email protected]

www.sandyhood.com

115I can work out all the formulas and figures but was finding it hard to explain capacity and efficieny.....yeah I dont know why

either:blushing:.

Thats helped loads....."Thank you"

Kate