Predetermined Overhead Rates
and Overhead Analysis in a
Standard Costing System
Appendix 10A
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
10A-2
Learning Objective 4
(Appendix 10A)
Compute and interpret
the fixed overhead
budget and volume
variances.
10A-3
Fixed Overhead Budget Variance
Actual
Fixed
Overhead
Budgeted
Fixed
Overhead
Fixed
Overhead
Applied
Budget
variance
Budget
variance
=
Actual
fixed
overhead
–
Budgeted
fixed
overhead
10A-4
Fixed Overhead Volume Variance
Actual
Fixed
Overhead
Budgeted
Fixed
Overhead
Fixed
Overhead
Applied
Volume
variance
Volume
variance
=
Budgeted
fixed
overhead
–
Fixed
overhead
applied to
work in process
10A-5
Fixed Overhead Volume Variance
Actual
Fixed
Overhead
Budgeted
Fixed
Overhead
DH × FPOHR
Fixed
Overhead
Applied
SH × FPOHR
Volume
variance
Volume variance
=
FPOHR × (DH – SH)
FPOHR = Fixed portion of the predetermined overhead rate
DH = Denominator hours
SH = Standard hours allowed for actual output
10A-6
Computing Fixed Overhead Variances
ColaCo
Production and Machine-Hour Data
Budgeted production
Standard machine-hours per unit
Budgeted machine-hours
Actual production
Standard machine-hours allowed for the actual production
Actual machine-hours
30,000
3
90,000
28,000
84,000
88,000
units
hours
hours
units
hours
hours
10A-7
Computing Fixed Overhead Variances
ColaCo
Cost Data
Budgeted variable manufacturing overhead
Budgeted fixed manufacturing overhead
Total budgeted manufacturing overhead
$
Actual variable manufacturing overhead
Actual fixed manufacturing overhead
Total actual manufacturing overhead
$
$
$
90,000
270,000
360,000
100,000
280,000
380,000
10A-8
Predetermined Overhead Rates
Predetermined
Estimated total manufacturing overhead cost
=
overhead rate
Estimated total amount of the allocation base
Predetermined
$360,000
=
overhead rate
90,000 Machine-hours
Predetermined
= $4.00 per machine-hour
overhead rate
10A-9
Predetermined Overhead Rates
Variable component of the
predetermined overhead rate
$90,000
=
90,000 Machine-hours
Variable component of the
predetermined overhead rate
= $1.00 per machine-hour
Fixed component of the
predetermined overhead rate
$270,000
=
90,000 Machine-hours
Fixed component of the
predetermined overhead rate
= $3.00 per machine-hour
10A-10
Applying Manufacturing Overhead
Overhead
applied
=
Predetermined
overhead rate
Standard hours allowed
×
for the actual output
Overhead
applied
=
$4.00 per
machine-hour
× 84,000 machine-hours
Overhead
applied
=
$336,000
10A-11
Computing the Budget Variance
Actual
fixed
overhead
Budgeted
fixed
overhead
Budget
variance
=
Budget
variance
=
$280,000 – $270,000
Budget
variance
=
$10,000 Unfavorable
–
10A-12
Computing the Volume Variance
Volume
variance
=
Budgeted
fixed
overhead
–
(
Fixed
overhead
applied to
work in process
)
$3.00 per
$84,000
×
machine-hour
machine-hours
Volume
variance
= $270,000 –
Volume
variance
= $18,000 Unfavorable
10A-13
Computing the Volume Variance
Volume variance
=
FPOHR × (DH – SH)
FPOHR = Fixed portion of the predetermined overhead rate
DH = Denominator hours
SH = Standard hours allowed for actual output
(
)
Volume
variance
$3.00 per
90,000
84,000
=
–
×
machine-hour
mach-hours
mach-hours
Volume
variance
= 18,000 Unfavorable
10A-14
A Pictorial View of the Variances
Actual
Fixed
Overhead
280,000
Budgeted
Fixed
Overhead
270,000
Budget variance,
$10,000 unfavorable
Fixed Overhead
Applied to
Work in Process
252,000
Volume variance,
$18,000 unfavorable
Total variance, $28,000 unfavorable
10A-15
Fixed Overhead Variances –
A Graphic Approach
Let’s look at a
graph showing
fixed overhead
variances. We will
use ColaCo’s
numbers from the
previous example.
10A-16
Graphic Analysis of Fixed
Overhead Variances
Budget
$270,000
Denominator
hours
0
0
Machine-hours (000)
90
10A-17
Graphic Analysis of Fixed
Overhead Variances
Actual
$280,000
Budget
$270,000
{
Budget Variance 10,000 U
Denominator
hours
0
0
Machine-hours (000)
90
10A-18
Graphic Analysis of Fixed
Overhead Variances
Actual
$280,000
Budget
$270,000
Applied
$252,000
{
{
Budget Variance 10,000 U
Volume Variance 18,000 U
Standard
hours
Denominator
hours
0
0
Machine-hours (000)
84
90
10A-19
Reconciling Overhead Variances and
Underapplied or Overapplied Overhead
In a standard
cost system:
Unfavorable
variances are equivalent
to underapplied overhead.
Favorable
variances are equivalent
to overapplied overhead.
The sum of the overhead variances
equals the under- or overapplied
overhead cost for the period.
10A-20
Reconciling Overhead Variances and
Underapplied or Overapplied Overhead
ColaCo
Computation of Underapplied Overhead
Predetermined overhead rate (a)
Standard hours allowed for the actual output (b)
Manufacturing overhead applied (a) × (b)
Actual manufacturing overhead
Manufacturing overhead underapplied or
overapplied
$
$
$
$
4.00 per machine-hour
84,000 machine hours
336,000
380,000
44,000 underapplied
10A-21
Computing the Variable Overhead
Variances
Variable manufacturing overhead rate variance
VMRV = (AH × AR) – (AH × SR)
= $100,000 – (88,000 hours × $1.00 per hour)
= $12,000 unfavorable
10A-22
Computing the Variable Overhead
Variances
Variable manufacturing overhead efficiency variance
VMEV = (AH × SR) – (SH × SR)
= $88,000 – (84,000 hours × $1.00 per hour)
= $4,000 unfavorable
10A-23
Computing the Sum of All Variances
ColaCo
Computing the Sum of All variances
Variable overhead rate variance
Variable overhead efficiency variance
Fixed overhead budget variance
Fixed overhead volume variance
Total of the overhead variances
$
$
12,000
4,000
10,000
18,000
44,000
U
U
U
U
U
10A-24
End of Appendix 10A
