PEV Dec 2005 paper - Fixed O/H Volume Variance Q - Help needed please

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
I am stuck on the methodology for the following answer from the Dec 2005 PEV paper and its getting me more muddled the longer I try and work it out so I hope someone will be able to point me in the right direction.

Info:

Standard cost for 1000 newspapers as follows:

Fixed Production Overheads - Quantity = 10 hours
- Unit Price = £12
- Total Cost = £120


Actual production was 600,000 units
Budgeted Output was 560,000 units


Based on my understanding the equation to work out Fixed overhead Volume Variance is:

(Actual production - Budgeted production) x standard absorption rate.

Can someone please explain how the answer for this is derived as:

(6,000 - 5,600) x £12 = £4,800 (F)

I understand the formula requirements and the unit rate for overhead absorption is a given £12 - what i dont understand is how they have gotten the answer to be the (6,000 - 5,600) - what have they divided the actual/budgeted outputs by?

My working lead to the following:

(600,000-560,000) = 40,000
Divide by 10 hours to find the cost of one unit then multiply it by the O/H rate of £12 = £48,000.

I know that this is wrong but I need help to understand what has been divided to get to the (6,000 & 5,600) figures and where I am going wrong.

Thanks in advance.

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:PEV Dec 2005 paper - Fixed O/H Volume Variance Q - Help needed please

    It's because the costs given are for the production of 1000 papers so they have divided the number of papers being produced by 1000.

    I think that's correct. Hope it helps!
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:PEV Dec 2005 paper - Fixed O/H Volume Variance Q - Help needed please

    sorry if i'm missing the point entirely - but isnt 600000 (actual production) divided by 1000 = 600 ???

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:PEV Dec 2005 paper - Fixed O/H Volume Variance Q - Help needed please

    think i got it now......

    It takes 10 hours to produce 1000 papers.

    Therefore 10/1000 = 0.01 hours per newspaper

    Multiply this by the total newspapers 600000 x 0.01 = 6000

    Is this the right way to answer this question - is my methodology correct?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:PEV Dec 2005 paper - Fixed O/H Volume Variance Q - Help needed please

    Divide the Total Cost of £120 by 1000 to give you £0.12.

    (600000-560000) = 40,000 (F)

    40,000 x £0.12 = £4,800 (F)
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:PEV Dec 2005 paper - Fixed O/H Volume Variance Q - Help needed please

    Hi,

    Those answers all look a bit confusing to me.

    I thought it was worked out from the hours rather than the output.

    The FO Volume Variance = (Standard hrs-budgeted hrs)x OAR

    The standard hours were worked out in a previous part of the question and come to 6,000.

    The budgeted hours are 5,600 because it takes 10 hrs to make 1000 so to make 560,000 it will take 10x560 hrs.

    Hence.... (6000-5600)x12 = 4800 F

    At least that's what I thought. Can anyone confirm this?

    All the best,
    Seren
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:PEV Dec 2005 paper - Fixed O/H Volume Variance Q - Help needed please

    Volume variance =
    Actual volume @ standard time(hours or units)
    Less
    Budgeted volume @ standard time 9hours or units)
    = variance in hours or units
    x standard cost per hour or unit.

    Volume variances should be worked out in the basis on how fixed overhead costs are absorbed.

    If ever in doubt the volume variances = efficieny and capacity variances added together, so if you are in doubt, it acts as a good cross check if you are not sure.

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:PEV Dec 2005 paper - Fixed O/H Volume Variance Q - Help needed please

    Just finished the same paper myself!

    The only way I can understand fixed overhead variences is as follows. Once you grasp the method all questions seem relatively easy to me.

    Fixed overheads seems to have the following elements;

    SHA - Standard hours of Actual Output
    SHB - Standard hours of Budgeted Output
    AH - Actual hours used

    In this case they equal;

    SHA - Actual output 600,000 / batches of 1000
    = 600

    SHB - Budgeted output 560,000 / batches of 1000
    = 560

    AH - Given in question as 6200 labour hrs worked.

    The Budgeted overhead absorbtion rate is 12.00 per labour hr and it takes 10 hrs to produce one batch of 1000.

    SHA - Is 600 Batches * 10hrs per batch *12.00
    or 6000*12.00

    SHB - Is 560 Batches * 10hrs per batch *12.00
    or 5600*12.00

    AH - Already gives hrs used to produce batches so does not need to be times by 10. Just need to times it by the overhead absorbtion rate per labour hr.
    = 6200*12.00

    This produce's the following figure to be used in the calculations

    SHA - 72000
    SHB - 67200
    AH - 74400

    I then use the following to do the overhead variences

    Volume = SHA - SHB
    Capacity = AH - SHB
    Efficency = SHA - AH

    This works everytime as long as you calculate them correctly in the first place. I could not understand them at all so give this way a try and see if it helps.

    Louise

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