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“Is career high singer. Accounting professor at sierra college and author of managerial accounting. This this video describes the two variances that are associated with fixed manufacturing overhead many organizations analyze fixed manufacturing overhead. I ll take a look at a couple of variances to try to figure out why costs differed from what was expected in the budget.
There are two variances two separate variances associated with fixed manufacturing overhead as you see here. The first is the spending variance. Which really analyzes whether we spent more or less than we expected to spend on our fixed overhead and fixed overhead. This is these are costs that for example would be related to the factory could be the rent on the factory may be we pay for insurance related to the factory.
Those would be fixed overhead. Examples and the spending variance really is looking at whether we spent more or less than we expected to spend on those types of items. Then we have a second variance and it s the fixed overhead production volume variance. And this has to do with whether we produce more product than we expected to produce and it ll come out of this variance and we ll talk about that in more detail in just a second let s start with the fixed overhead spending variance.
What is it and how do we calculate it i talked a little bit about it in the first slide that the fixed overhead spending variance is the difference between the actual fixed overhead costs and the budgeted fixed overhead costs..
So it s pretty straightforward what are the actual costs associated with fixed overhead. What did we expect those costs to be and let s take the difference and whatever that difference is that is our spending variance. If the actual costs are higher than the budgeted costs then it s an unfavorable variance. If the actual costs are lower than the budgeted costs then it s a favorable variance.
The fixed overhead costs are typically not driven by a specific activity. And this is different than when we looked at the other variances in separate lectures the direct materials variances the direct labor variances the variable manufacturing overhead variances those are usually driven by some specific level of activity some type of activity fixed overhead costs are not as easily linked to a specific activity. So forth our third bullet point here managers have to review. Then the detail of the actual costs and the budgeted cost to find out why is there a difference.
If we have a favorable or unfavorable variance. It takes some some real investigation and and diving into the records to try to figure out why those actual costs are higher or lower than expected now we ll take a look at the fixed overhead production volume. Variance. So.
The fixed overhead production volume..
Variance is the difference between the budgeted fixed overhead costs. And i use the term fixed overhead and fixed manufacturing overhead interchangeably so it s the difference between the budgeted overhead fixed overhead costs and the applied fixed overhead costs we most companies will apply fixed overhead to products based on on some method. It could be that they base it on direct labor hours or machine hours or it could be an activity based costing type of a system. And the fixed overhead production volume.
Variance. Really is simply the difference between what we had budgeted for our fixed overhead cost. And what we had applied to our products and that s what you see right down here. In this formula.
So. The fixed overhead production volume. Variance last. Bullet point.
Here is typically the direct result of the difference in volume between budgeted production..
What we expected to produce and actual production. What we actually produced let s take a look at a more detailed example of this on the next slide. So we re going to work from left to right here. With this fixed manufacturing overhead variance analysis on the left you ll see that we have actual fixed overhead costs and our actual fixed overhead costs amounted to a one hundred thirty six thousand dollars.
The middle in the middle column you ll see that we had the flexible budget. This is where we present the the flexible budget for our fixed overhead costs and that flexible budget amounts to one hundred forty thousand two hundred eighty dollars. And there s lots of detail in the footnotes down below. So you can take a look at those if you if you want to know where these numbers come from and as we move our way to the right over the far right we re looking at fixed overhead costs that were applied to the products.
The assumption in this example is that we apply our fixed overhit based on direct labor hours. So you can see that in the footnotes. Again you can dive into the footnotes to see where those numbers come from and the total fixed overhead costs that were applied to products is one hundred forty seven thousand dollars. So let s go back go back over to the left.
And we ll take a look at the fixed overhead spending variance..
Which turns out to be favorable well the flexible budget says that we expected to spend one hundred forty thousand two hundred eighty dollars. We expected cost of one hundred forty thousand two hundred eighty dollars related to our fixed overhead turns out actual costs were one hundred thirty six thousand dollars so we have a four thousand two hundred eighty dollar favorable fixed overhead spending variance and as i mentioned before we need to dive into the records to find out why our actual overhead costs were lower than the flexible budget. What we expected to see in fixed overhead costs and then as we move our way over to the right here. We we see the production volume variance and the production volume.
Variance is the difference between our flexible budget. That s right here. The one hundred forty thousand to 80 and the fixed overhead costs that were applied to our products of one hundred forty seven thousand dollars. The difference in these two numbers is related strictly to the number of units that were produced and sold.
Which was two hundred ten thousand units. If you look in the footnotes you ll see that and that s how overhead costs are applied versus the two hundred thousand four hundred units that were budgeted to be produced and that s related to the flexible budget. So again it s production volume variance and it really is very descriptive that that variance name because this variance relates directly to production volume. We produced more units than we expected to produce and therefore we applied more fixed overhead costs than were in the flexible budget and as a result we have as you see here a six thousand seven hundred twenty dollar favorable fixed overhead production volume variance ” .
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