Fixed Manufacturing Overhead Variances
Practice As You Learn
Introduction to Accounting
Fixed Manufacturing Overhead Variances – Practice as You Learn:
Follow these steps when you are asked to calculate variances for fixed manufacturing overhead.
1) Write the column heading first:
Actual Budget Applied
2) Put the actual dollars spent on the left; this will be given to you
3) The budget is the amount the company expected to pay for fixed overhead. It will either be given to you as a “budgeted” / “standard” / “estimated” amount or you will have to calculate it by multiplying the number of units you expect to produce x the quantity of activity it takes to make one unit x the standard fixed overhead cost per activity (the predetermined overhead rate).
4) Calculate the applied amount the same way you calculate the SQ x SP. Actual units made x how many of the activity one unit is supposed to take x standard fixed overhead cost per unit (the predetermined overhead rate).
5) Left compared to middle is the budget variance. Middle compared to right is the volume variance. If the left is less than the right it is favorable as you have spent less money than you expected to spend.
Fixed Manufacturing Overhead Variances – Practice as You Learn – Problem 1.
KKR Company is a manufacturing company. The following data has been gathered:
Standard
Materials 3 pounds at $3 per pound
Labor 5 hours at $10 per hour
Variable Overhead $7 per labor hour
Fixed Overhead $30 per labor hour
Budgeted production for the year 5,000 units
Actual
Materials Purchased 15,000 pounds for $46,210
Materials Used 15,300 pounds
Direct Labor 24,860 hours at $239,500
Variable Overhead $168,600
Fixed overhead $724,903
Units produced 5,200
1a. The fixed manufacturing overhead spending variance is
a. 30,000 favorable
b. 6,000 favorable
c. 25,097 favorable
d. 574,903 unfavorable
1b. The fixed manufacturing overhead volume variance is
b. 6,000 favorable
c. 25,097 favorable
d. 574,903 unfavorable
Answer
Fixed Manufacturing Overhead Variances – Practice as You Learn – problem 1.
1a. is C
1b. is A
Actual Budget Applied
(given) 5,000 x 5 x $30 5,200 x 5 x $30
$724,903 = $750,000 = $780,000
Variance $25,097 F $30,000 F
budget volume
The standard direct labor quantity of 5 per unit is used because the fixed overhead rate is based on labor hours. Each one that was made was expected to cost $150 (5 hours each x $30 per hour, the predetermine overhead rate)
For the budget – you are calculating how many hours it would take to make the units you think you are going to make (5,000 x 5 each) and then what it costs for each hour (x $30 per hour used).
For the applied – you are calculating how much activity you estimated it would take to produce what you actually did (5,200 x 5 each) and then what it should have cost to produce them (x $30 per hour used).
The budget variance is favorable because you spent less than you budgeted (expected).
The volume variance is favorable because you were able to make more products than
expected. Remember that fixed costs do not go up when you make more, they are constant in total.
Fixed Manufacturing Overhead Variances – Practice as You Learn – Problem 2.
Follow the same 5 steps described above for fixed overhead variances.
The following activity took place at Octy Manufacturing Company:
Number of units produced 500 units
Material purchased 1,600 feet
Material used 872 feet
Actual cost per foot for material $4
Direct labor hours worked 1,822
Actual direct labor cost per hour $10.25
Actual machine hours used 1,246
Actual variable overhead $ spent $11,212
Actual fixed overhead $ spent $32,076
The standard cost sheet shows that management estimated that 1.6 feet of material would be used for each product and materials would cost $4.20 per foot; it would take labor 4 hours to make 1 product at a cost of $10 per hour; variable overhead cost is expected to be $8.50 per machine hour used and it should take 2.2 machine hours to make one product. Fixed manufacturing overhead is expected to cost $25 per machine hour. The company expected to produce 550 units during the year.
2a. The fixed manufacturing overhead spending variance is
a. 5,000 favorable
b. 1,826 unfavorable
c. 1,250 unfavorable
d. 2,750 unfavorable
2b. The fixed manufacturing overhead volume variance is
b. 1,826 unfavorable
c. 1,250 unfavorable
d. 2,750 unfavorable
Answer
Fixed Manufacturing Overhead Variances – Practice as You Learn – Problem 2.
2.a is B
2.b. is D
Actual Budget Applied
(given) 550 x 2.2 x $25 $25 500 x 2.2 x $25
$32,076 = $30,250 = $27,500
Variance $1,826 U $2,750 U
budget volume
The standard machine hour quantity of 2.2 per unit is used because the fixed overhead rate is based on machine hours.
Budget – you are calculating how many machine hours it would take to make the units you think you are going to make (550 x 2.2 hours each) and then what it costs for all ( x $25 per machine hour).
Applied – you are calculating how many machine hours it should have taken to produce what you actually did (500 x 2.2) and then what it should have cost to produce them (x $25 per machine hour).
The budget variance is unfavorable because you spent more than you estimated
The volume variance is unfavorable because you did not produce as many as you expected for the amount of money spent. Fixed costs do not decrease because you produce less, they stay the same regardless of the number of units produced. Therefore, the cost per unit is higher, which is unfavorable.