Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
15-31 Three-Variance Factory Overhead Analysis (40 minutes)
1. Standard variable factory overhead rate per direct labor hour (DLH):
= Budgeted Total Variable Factory Overhead ÷ Budgeted Total Direct Labor Hours
Standard fixed factory overhead rate per DLH:
= Budgeted Total Fixed Factory Overhead ÷ Practical Capacity Labor Hours
= Practical Capacity Labor Hours ÷ Practical Capacity, in Units = 0.5 DLH/unit
Three-Variance Overhead Analysis
Flexible Budget Flexible Budget
Based on Inputs Based on Output Applied
Actual Cost AQ × SP (SQ × SP) (SQ × SP)
$ 15,600 2,700 × $6 = $ 16,200 2,400 × $6 = $14,400
+ 92,000 + 90,000 + 90,000 2,400 × $42
$107,600 $106,200 $104,400 = $100,800
Spending variance Efficiency Variance Production Volume
Variance
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Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
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2. Total overhead spending variance = variable overhead spending variance + fixed
overhead spending variance
Total overhead efficiency variance = variable overhead efficiency variance
the overhead variance)
In sum, the only difference between the three-way and four-way analysis is that in the
former, the spending variances for fixed and for variable overhead (reported in the
latter) are combined into a single overhead spending variance.
Three- and Four-Variance Factory Overhead Analysis: Summary
Overhead Spending Variance:
Variable Overhead Spending Variance $ 600F
Fixed Overhead Spending Variance 2,000U $1,400U
Overhead Efficiency Variance:
Variable Overhead Efficiency Variance $1,800U
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Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
15-32 Two-Variance Analysis of the Total Overhead Variance (40 minutes)
1. Standard variable factory overhead rate per direct labor hour (DLH) $ 6.00
Standard fixed factory overhead rate per DLH 36.00
Two-Variance Overhead Analysis
Flexible Budget Based Overhead
Actual Cost on Output Applied
$ 15,600 2,400 × $6 = $14,400
+ 92,000 + 90,000 2,400 × $42
$107,600 $104,400 = $100,800
2. Total Controllable (Flexible) Budget Variance for Overhead:
a) Variable Overhead Spending Variance $ 600F
b) Variable Overhead Efficiency Variance $1,800U
c) Fixed Overhead Spending Variance $2,000U $3,200U
Production Volume Variance 3,600 U
Total Overhead Variance $6,800U
That is, three items from the four-variance analysis (viz., variable overhead spending
3. The two-variance breakdown of the total overhead variance reports two important
factors concerning overhead costs. The flexible-budget (controllable) variance
measures the difference between the actual overhead incurred and the overhead that
should have been incurred based on the actual output of the period. (This latter term
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Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
15-32 (Continued)
The production volume variance, when the fixed overhead application rate is based
on practical capacity, reports the effectiveness of the organization in using available
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Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
15-33 Factory Overhead Analysis–Two, Three, and Four Variances; Spreadsheet
Application (60 Minutes)
1. Total Factory Overhead Application Rate:
Fixed factory overhead application rate:
Total machine hours at practical capacity:
Number of units of output at practical capacity = 40,000
Machine hours per unit × 2
Standard machine hours @ practical capacity 80,000
Fixed factory overhead rate per machine hour = budgeted
2. Total Flexible Budget (FB) for Overhead Based on Units Produced :
Total standard machine hours allowed for the units produced =
42,000 units produced × 2 machine hours per unit = 84,000 hours
Manufacturing overhead in the flexible budget for 42,000 units:
3. Production Volume Variance for 2016:
Fixed Overhead:
Actual Cost Budget Applied
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or, Production Volume Variance = SP × (Denominator Volume − SQ)
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Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
= $4.50/machine hr. × (80,000 − 84,000) machine hours
= $18,000F
4. and 5.
FB Based on FB Based on
Actual Inputs Output Applied
VOH $3 × 85,000 hrs. $3 × 84,000 hrs. $3 × 84,000 hrs.
= $255,000 = $252,000 = $252,000
FOH $4.50 × 84,000 hrs.
360,000 360,000 = 378,000
Total factory overhead incurred $625,000
FB for Overhead Based on Inputs (i.e., actual machine hours):
Variable factory overhead: 85,000 mach. hrs. × $3/hour = $255,000
Fixed factory overhead (“lump-sum” amount): 360,000 615,000
Factory overhead spending variance $ 10,000U
FB for Overhead Based on Inputs (i.e., actual machine hours) $615,000
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Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
15-33 (Continued-2)
FB Based FB Based
on Inputs on Outputs
6. Actual (AQ × SP) (SQ × SP) Applied
VOH $250,000 $255,000 $252,000
Spending Variance Efficiency Variance
= $250,000 − $255,000 = $255,000 − $252,000
An Excel spreadsheet solution file for this assignment is embedded below. You can
open this “object” by doing the following:
1. Right click anywhere in the worksheet area below.
2. Select “worksheet object” and then select “Open.”
3. To return to the Word document, select “File” and then “Close and return
to…” while you are in the spreadsheet mode. The screen should then return
you to this Word document.
Ex. 15-33 7e.xlsx
Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
15-34 Journal Entries for Factory Overhead Costs and Standard Cost Variances;
Spreadsheet Application (60 minutes)
Supporting data:
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Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
15-34 (Continued-1)
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Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
15-34 (Continued-2)