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Discuss the following: 1. Variable Overhead Variances 2. Fixed Overhead Variances 3. Sales Margin Variance

      

Discuss the following:
1. Variable Overhead Variances
2. Fixed Overhead Variances
3. Sales Margin Variance

  

Answers

Wilfred
1. Variable Overhead Variances
- This is the difference between the standard variable overhead cost for the production achieved and the actual variable overhead incurred. In other words, this is the difference between the actual variable overheads incurred and the variable overheads absorbed. This variance is simply the over or under absorption of overheads. This is the sum of variable overhead expenditure variance and variable overhead efficiency variance.
(a) Variable Overhead Expenditure Variance
This is the difference between the actual overheads incurred and the allowed variable overheads based on the actual hours worked. It is calculated as under:-
Actual variable overhead – V.O.A.R x Actual labour hours
Where: V.O.A.R = Variable overhead absorption rate. This variance may arise due to rise or fall in overhead expenditure as a result of some unexpected changes.
(b) Variable Overhead Efficiency Variance
This is the difference between the allowed variable overheads and the absorbed variable overhead. It is calculated as under:-
V.O.A.R (Actual hours – Standard hours)
The main cause of this variance is the difference between actual hours and standard hours

2. Fixed Overhead Variances
- This is the difference between the standard cost of fixed overhead absorbed in the production achieved, whether completed or not and the fixed overhead attributed and charged to that period. This simply represents under or over absorption. This is the sum of fixed overhead expenditure variance and fixed overhead volume variance.
(a) Fixed overhead expenditure variance
- This is the difference between the budget cost allowances for production for a specified control period and the actual fixed expenditure attributed and charged to that period. It is calculated as under:
Actual expenditure – Budgeted expenditure
(b) Fixed overhead volume variance
- This is that portion of the fixed production overhead variance which is the difference between the standard cost absorbed in the production achieved, whether completed or not, and the budget cost allowance for a specified control period. This is the sum of fixed overhead efficiency variance and fixed overhead capacity variance. It is calculated as under:-
Standard cost (Actual production – Budget production) per unit.
- The main cause of this variance is the difference between actual level of production and budgeted production.
(c) Fixed overhead efficiency variance
This is that portion of the fixed production overhead volume variance which is the difference between the standard cost absorbed in the production achieved, whether completed or not, and the actual labour hours worked, valued at the standard hourly absorption rate. It is calculated as under.
=F.O.A.R. (Actual hours – Standard hours) Or
=Standard cost per unit (Actual quantity – Standard quantity)
Where: F.O.A.R. = Fixed overhead absorption rate.
(d) Fixed Overhead Capacity Variance
- This is that portion of the fixed production overhead volume variance which is due to working ad higher or lower capacity than standard. Capacity is often expressed in terms of average direct labour hours per day, and the variance is the difference between the budget cost allowance and the actual labour hours worked, valued at the standard hourly absorption rate. It is calculated as under:-
= F.O.A.R. (Actual hours – budgeted hours) or
= Standard cost per unit(Budgeted production-Standard production)

3. Sales Margin Variance
The standard sales margin is the difference between the standard selling price of a product and its standard cost. It is also known as the standard profit for the product. Total sales margin variance is the difference between the budgeted margin from sales and the actual margin when the cost of sales is valued at the standard cost of production. This is the sum of sales margin price variance and sales margin quantity variance.
(a) Sales margin price variance
This is that portion of the total sales margin variance which the difference between the standard margin per unit and the actual margin per unit fo te number of units sold in the period. It is calculated as under:-
Actual sales – (Standard selling price x Actual sales quantity)
(b) Sales Margin Quantity Variance
This is that portion of the total sales margin variance which is the difference between the budgeted number of units sold and the actual number sold valued at the standard margin per unit. It is calculated as under:-
=Standard sales margin(Actual sales quantity-Budgeted sales quantity)
Or profit


Wilfykil answered the question on August 7, 2019 at 05:30

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