PAMDILL this is for you

SandyHood

I've read your posts about how many headaches you have had over fixed overhead variances.

I've put this together to try to help. (based on the Dec 2008 PEV exam)

Budget (drawn up before the accounting period started)

Production (units) 2,000 units
Overheads are fixed and absorbed on a labour hour basis
Budgeted labour hours 4,000 hrs
Budgeted cost of fixed overheads £120,000

from this we can derive
the overhead absorption rate: Budgeted cost of fixed overheads £120,000.............£30.00 per labour hour
the overhead absorption rate: Budgeted labour hours 4,000 hrs

Now we can look at the volume variance and its two subvariances, capacity and efficiency.

Fixed overhead volume variance
The difference between the overhead absorbed by actual production and the budgeted overhead (based on budgeted production), so it is all down to the volume of units produced.

The actual production was 2,100 units.
Each unit requires 2 standard labour hours
and we know from our earlier calculation, the OAR is £30.00 per labour hour

So absorbed overhead is: 2,100 x 2 hrs x £30.00 = £126,000

As £120,000 was budgeted

Then we absorbed £6,000 more than than the budget (a favourable variance)

(I wonder if you were trying to absorb based on actual hours worked, rather than standard hours produced)
Remember, under standard costing we must absorb on the basis of standard hours produced.

Capacity
We know what this means day-to-day
E.g. If I have a 5-seater car, I know I have a capacity to transport 5 people (inc the driver)
The capacity of production is based on the hours worked. If 4,000 hours are actually worked AND this is the same as 4,000 hours being budgeted, then there has been no variance in the capacity (or capability to produce the products). At 2 standard hours per unit, they both show a capacity to produce 2,000 units.

Efficiency
This is the measure of how well the time is used.
The difference between the standard hours produced and the actual hours. If actual hours taken are less than the standard hours produced that means the production was efficient (a favourable variance).
In this case
2,100 x 2 hrs x £30 = £126,000
less 4000 hrs x £30 = £120,000

A favourable variance of £6,000

As Volume variance should = Efficiency + Capacity
we can be quite pleased to see
£6,000 = £6,000 + £0

PAMDILL

Thanks will try to absorb it over the weekend, I get the bit about efficiency meaning we have worked less hours than budgeted and capacity, it is just the money absorbed side that confuses the heck out of me.

Londina

thanks too Sandy, very useful.

taskey

thanks sandy - i will print this off too.

Tracy

John8

thanks too john

SandyHood

fixed overhead variances

As this topic tends to be applicable for thos students preparing for Nov 30 2009, I have brought it up the forum

SandyHood

As this topic tends to be applicable for thos students preparing for tomorrow, I have brought it up the forum

Flying Scarlet

Thankyou Sandy!! I have been struggling with this all weekend!!

SandyHood

For A-Vic
I hope you find it helps

A-Vic

Great thanks sandy will do a lot

taskey

bumping this up overhead variances

bumping this up overhead variances

SandyHood

agg25 asked about variances
I hope this thread helps

Cudey

Hi Sandy - Sorry to bump this up, but have been searching the forum as this topic has confused me.

I'm unclear about the difference between your efficiency and capacity.

I make capacity to be your Actual hours worked times by your Standard OAR per hour and your Budgeted Hours Worked times your Standard OAR per hour. In this example this will be:

Actual Hours 4200 (2100 units produced x 2 hours per unit) x £30 = £126,000
Budgeted Hours 4000 x £30 = £120,000

For efficiency I make it to be your Actual hours worked x Standard OAR per hour and your Actual units produced x standard hours x OAR (Being the amount of hours you expected to use) so:

Actual hours 4200 x 30 = £126,000
Actual units 2100 x 2 x 30 = £126,000 = £0?

I have both of these around the wrong way compared to you? I've done mine based on my interpretation from my study notes? Any help would be greatly appreciated.

SandyHood

Dear Cudey

I'm very pleased you bumped this up.
Capacity
The capacity of production is based on the hours worked.
Be sure that you compare the budgeted hours with the actual hours worked don't let the standard hours for actual production sneak in.

Here the budgeted hours were 4,000 Budgeted labour hours 4,000 hrs
And the actual hours worked would be collected from timesheets (not calculated using the number of units produced) If 4,000 hours are actually worked

This then fits your definition:
I make capacity to be your Actual hours worked times by your Standard OAR per hour and your Budgeted Hours Worked times your Standard OAR per hour. In this example this will be:

Actual Hours worked 4,000 x £30 = £120,000
Budgeted Hours 4000 x £30 = £120,000

And for Efficiency

You are comparing the standard hours needed for the actual number of units produced with the actual time it took

For efficiency I make it to be your Actual hours worked x Standard OAR per hour and your Actual units produced x standard hours x OAR (Being the amount of hours you expected to use) so:

Actual hours worked 4,000 x £30 per hour = £120,000
Actual units 2100 x 2 hrs per unit x £30 per hour = £126,000 = £6,000 favourable

You see that 2,100 units ought to take the workforce 4,200 hours to make - but they were more efficient than the standard time - they made 2,100 units in 4,000 hours. This gives the favourable variance.

Cudey

Hi Sandy,

Thanks for explaining that. Though it still doesn't sit comfortable with me, and what i'm interpreting from my text books. To me it would appear that you taken an assumption that the workforce actually worked the budgeted amount of hours. I think it's the difference between standard hours for production and actual hours worked that is throwing me as I just can't see where you're getting the other 4,000 from? 4,000 is only mentioned once right? I haven't misread something?

Thanks for your help on this Sandy.

SandyHood

Dear Cudey
Please remember that this was taken from the Dec 2008 PEV exam
I am sorry to say that you have misread something.
The question has two values of 4,000 hours
In the budget 4,000 hours are the budgeted hours needed to produce 2,000 solar panels
AND in the actual results 4,000 hours were worked to produce 2,100 solar panels

They are shown clearly in the question in two separate columns
This is what I wrote for Pamdill in May 2009

Capacity

The capacity of production is based on the hours worked. If 4,000 hours are actually worked AND this is the same as 4,000 hours being budgeted, then there has been no variance in the capacity (or capability to produce the products). At 2 standard hours per unit, they both show a capacity to produce 2,000 units.

I can understand that the use of "if" might suggest to you that I was guessing the actual hours worked. I wasn't. See the attached copy of this question HeetMe Dec2008 PEV

Cudey

Hi Sandy, That solves that one! I was under the impression that the actual wasn't given, however as you said the budgeted and actual are both 4,000. My method was right, but I just took the actual as 2100 multiplied by 2 to give me 4,200 instead of reading the 4,000! Thanks for your help with that Sandy, It's best to get those errors out of the way before the exam day!

SandyHood

Dear Cudey

That is good

I use the words output and input in my book. I think they help. The standard hours produced is based on the actual output, whereas the hours input are the actual hours worked (per timesheets/clock cards etc)
The standard fixed overhead cost of actual production is the standard cost of (say) hours x the standard hours per unit x the units produced [or the standard overhead cost per unit produced x the number of units of actual output]

The standard fixed overhead cost of the hours worked is the actual hours x the standard overhead cost per hour [standard cost per hour flexed to the hours input into production]