Variance Analysis 5.16
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George BulikiVariance Analysis 5.16
Uploaded by
George BulikiSOTE TWAWEZA 2012
QUESTION 5.16
A manufacturing company, Hexicon, has provided you with the following data which relates to product RYX, for the period which has just ended. Budget Actual Number of labour hours 8,400 7,980 Production units 1,200 1,100 Overhead cost (all fixed) $22,260 $25,536 Overheads are absorbed at a rate per standard labour hour.
Required
(a)
(i)
Calculate the fixed production overhead cost variance and the following subsidiary variances. Expenditure Efficiency Capacity
(ii) (b) (c)
Provide a summary statement of these four variances.
(8 marks)
Briefly discuss the possible reasons why adverse fixed production overhead expenditure, efficiency and (9 marks) capacity variances occur. Briefly discuss two examples of inter-relationships between the fixed production overhead efficiency variances and the material and labour variances. (3 marks)
(Total = 20 marks)
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Questions
SOTE TWAWEZA 2012
SOLUTION
(a)
(i)
Budgeted fixed overhead absorption rate =
$22,260
8,400 hours = $2.65 per labour hour
Standard labour hours per unit of component RYX =
8,400 hours
1,200 units = 7 hours per unit
Standard fixed overhead absorbed per unit =
7 hours
$2.65 per hour = $18.55 $ 25,536 20,405 5,131 (A) 22,260 25,536 3,276 (A) 7,700 hrs 7,980 hrs 280 hrs (A) $2.65 $742 (A) 8,400 hrs 7,980 hrs 420 hrs (A) $2.65 $1,113 (A) $ 3,276 (A) 742 (A) 1,113 (A) 5,131 (A)
Fixed production overhead incurred Fixed production overhead absorbed (1,100 Fixed production overhead cost variance
$18.55)
Budgeted expenditure Actual expenditure Fixed production overhead expenditure variance 1,100 units should have taken ( 7 hrs) but did take standard rate per hour Fixed production overhead efficiency variance Budgeted hours of work Actual hours of work standard rate per hour Fixed production overhead capacity variance (ii)
Reconciliation of fixed overhead variances
Expenditure variance Efficiency variance Capacity variance Cost variance (b)
Possible reasons for the occurrence of the fixed overhead expenditure, efficiency and capacity variances Expenditure variance
This variance represents the difference between actual and budgeted fixed overhead expenditure. An overall adverse variance could arise if expenditure on one or more categories of fixed overhead was higher than anticipated (the actual expenditure on other categories either being at the same level as, or not significantly less than, anticipated). There may be a greater than expected rise in buildings insurance premium, for example. Alternatively global factors, such as a rate of inflation higher than that allowed for in the budget, will have a more general adverse effect on fixed overhead expenditure.
Efficiency variance
This variance shows the effect, at the standard absorption rate per hour, of actual hours worked being more or less than the standard allowance for the actual output. An adverse variance will occur if actual hours are
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Answers
SOTE TWAWEZA 2012
greater than standard hours; possible reasons for this are the same as those for an adverse labour efficiency variance and include the following.
(1) (2) (3) (4) (5) (6)
The use of less skilled labour than that stipulated in the standard.
Higher than anticipated labour turnover, resulting in more time spent on training than budgeted.
The use of poor quality materials, with the result that production takes longer than budgeted. The use of poor quality materials leading to a higher scrap rate than anticipated and hence more time spent on rectification than planned. Problems with motivation and morale. The standard hours could have been set unrealistically low.
Capacity variance
This component of the volume variance does not take into account the standard hours per unit of production but simply compares the actual number of hours worked with the budgeted number of hours, the difference being multiplied by the standard absorption rate per hour to calculate the variance. An adverse variance arises if actual hours worked are less than budgeted hours (because we would expect output to be less than budgeted). Possible reasons for such a variance include the following. (1) (2) (3) (4) (c)
Lack of demand for the product A higher than anticipated level of downtime due to problems with plant and machinery Shortage of labour Excessive time lost due to sickness or disputes
Individual variances should not be looked at in isolation. One variance might be dependent upon another, and much of it might have occurred only because the other inter-dependent variance occurred too. Consider the following examples. (1)
Using less skilled workers than anticipated when standards were set is likely to result in a favourable labour rate variance (because the labour rate should be less) but, because the workers are likely to be less efficient and less skilled at using materials, it could also produce adverse labour efficiency, material usage and fixed production overhead efficiency variances.
(2)
The use of materials of a higher quality than required by a standard could produce an adverse material price variance (because the material is likely to be more expensive) but, because the material could be easier to use, it could lead to favourable material usage, labour efficiency and fixed production overhead efficiency variances.
Answers
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