Fixed Overhead Variances

anniebabe

This maybe really simple but after having a couple of days off studying - my brain has stopped working

I am looking at Financial Performance Workbook - Osborne page 10

Question 3.4

You have been given the following information:

* Budgeted overheads are £120,000
* Budgeted output is 12,000 units and 4,000 labour hours
* Actual output is 11,400 units and 3,950 actual hours
* Actual overheads are £118,000

Complete the table to show the fixed overhead variances:
Expenditure
Capacity
Efficiency
Volume

My question is this -

How do you know how to work out the OAR - if it is not stated, ie labour hours, units etc.
I understand that you need to use the Budgeted overhead £120,000 and divide - but they do not indicate which figures to use. If what I am saying makes any sense.
I can see the answer and they have used 4,000 labour hours to get an OAR of £30.00, just need to get it straight in my head which one to choose - the hours or the units - as it doesnt always tell us.
Many thanks

SandyHood

How do you know how to work out the OAR - if it is not stated, ie labour hours, units etc.

If you are asked to split the volume variance between capacity and efficiency, you cannot be using a units basis for the OAR.
That leaves only labour available.

anniebabe

ok - thanks Sandy, I am sure I have already been told that at some point - but my mind was blank.

Thanks again.

babsa

I have worked out the answer see below, hope this helps.

Actual production at Actual Cost (AA)
11400 Units 3950 hours = £118,000

Actual Production at Standard Cost (AS)
11400 Units 3950 hours x £30 per hours = £118,500

Standard production at Standed Cost (SS)
11400 Units / 3 units per hours = 3800 hours x £30 per hour = £114,000

Budget production at Budgeted Cost (BB)
12000 Units / 3 units per hour = 4000 hours x £30 per hour = £120,000

Fixed Overhead Expenditure Variance
BB £120,000
AA £118,000
= £ 2,000 F

Fixed Overhead Capacity Variance
AS £118,500
BB £120,000
= £ 1,500 A

Fixed Overhead Efficiency Variance
SS £114,000
AS £118,500
= £ 4,500 A

Fixed Overhead Volume Variance
SS £114,000
BB £120,000
= £ 6,000 A

anniebabe

Hi Babsa

Thanks for trying to help - not sure why I am getting confused with the questions where it doesnt tell me the OAR (hours/units).
I am going to keep working on it today - I should know it by now - moving on to the ratios at college tmoz.