Fixed Overhead Variance Analysis (PEV)

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
This is my first post so hello to you all. I'm having problems understanding the calculations for Capacity and Efficiency Variances of Fixed Overhead, to such a extent that I've eventually joined the forum in the hope that some-one could explain it in a way that might possibly sink in. I'm really getting confused as to which figures to use for which equation. Help!!!!!!

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Fixed Overhead Variance Analysis (PEV)

    Hi Lz.

    FIXED OVERHEAD VARIANCES

    FIXED OVERHEAD VOLUME VARIANCE

    (STANDARD HRS PRODUCED – BUDGETED HRS) X ABSORPTION RATE

    FIXED OVERHEAD CAPACITY VARIANCE (SUB-VARIANCE)
    (BUDGETED HRS – ACTUAL HRS) X ABSORPTION RATE

    FIXED OVERHEAD EFFICIENCY VARIANCE (SUB-VARIANCE)
    (STANDARD HRS PRODUCED – ACTUAL HRS WORKED) X ABSORPTION RATE


    N.B. THE TWO SUB-VARIANCES SHOULD EQUAL THE TOTAL VARIANCE
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Fixed Overhead Variance Analysis (PEV)

    Thanks Scotty.
    Still a grey area, am I right in thinking that the standard hrs produced is the time it should have taken to produce the actual output? This is really doing my head in - I can normally catch on quite easily but for some reason I just have a mental block with this!!!
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Fixed Overhead Variance Analysis (PEV)

    Lzbdd
    I think it might help to understand what these variances are in words and go on to calculations afterwards.

    Capacity and Efficiency Variances of Fixed Overhead

    Fixed Overhead Capacity Variances show how much the capacity actually used for production varies from the capacity budgeted

    In most firms capacity is dictated by hours of work. If the firm has budgeted for 6 people working a 35 hour week each then budgeted capacity is 210 hours (35 x 6).
    If we look back at the hours actually worked we may find 200 hours were worked.

    In this case we had a lower capacity than budget. This will be an adverse variance.

    Fixed Overhead Efficiency Variances show how well the hours worked were used to produce the output.
    This tends to be the one that follows our general understanding of what it is to be efficient

    If we produced 110 units and the standard time to make each unit is 2 hours, we would have 220 standard hours of production.
    We then compare this with the actual hours 200 hours (as in the other example). So we have been more efficient than the standard would expect. The variance would be favourable.

    sandy.hood@chichester.ac.uk
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Fixed Overhead Variance Analysis (PEV)

    So to put the numbers into an analysis:-

    Lzbdd Ltd produce a single product A posh chair

    Fixed Overheads are absorbed using direct labour hours.
    Each chair has a standard cost which includes 2 hours of direct labour at an overhead absorption rate of £8.00 per hour.
    We budgeted to produce 100 chairs in February.

    During February
      110 chairs were produced,
      200 direct labour hours were worked
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Fixed Overhead Variance Analysis (PEV)

    We can work out the variances in a number of ways:
      Fixed Overhead Capacity Variance
        (Budgeted hours - Actual hours) x OAR
        ((105 x 2hrs per chair)- 200 hours) x £8.00 per hour
        (210 - 200) x £8.00
        10 hours x £8.00
        £80.00
      adverse
    • System
      System Posts: 100,534 🤖 Admin 🤖
      Re:Fixed Overhead Variance Analysis (PEV)
        Fixed Overhead Efficiency Variance
          (Standard hours produced - Actual hours worked) x OAR
          ((110 chairs x 2 hrs per chair) - 200 hours) x £8.00 per hour
          (220 - 200) x £8.00
          20 hours x £8.00
          £160.00
        favourable
      • System
        System Posts: 100,534 🤖 Admin 🤖
        Re:Fixed Overhead Variance Analysis (PEV)

        Fixed Overhead Capacity Variance was adverse because fewer hours were worked compared to budget.

        Fixed Overhead Efficiency Variance was favourable because 110 chairs should take 220 hours to make, but our workforce managed to make them in only 200 hours.

        I hope this helps

        Sandy

      • System
        System Posts: 100,534 🤖 Admin 🤖
        Re:Fixed Overhead Variance Analysis (PEV)

        Cheers Sandy.

        That makes it a lot clearer.

        Just need time and lots of practise before June. Hopefully it will have all come together by then!!

      • System
        System Posts: 100,534 🤖 Admin 🤖
        Re:Fixed Overhead Variance Analysis (PEV)


        hi there,

        Fixed Overhead Capacity Variance
        Budgeted hours - Actual hours) x OAR
        ((105 x 2hrs per chair)- 200 hours) x £8.00 per hour
        (210 - 200) x £8.00
        10 hours x £8.00
        £80.00 adverse

        where did 105 come from? i think it should be 100.

        thanks for ur efforts.
      • System
        System Posts: 100,534 🤖 Admin 🤖
        Re:Fixed Overhead Variance Analysis (PEV)

        Just think about the budget
        If the firm has budgeted for 6 people working a 35 hour week each then budgeted capacity is 210 hours (35 x 6).

        So if you have a standard time of 2 hours per chair

        Then your budgeted output would be 210hrs/2hrs per chair = 105 chairs

        Sandy

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