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Prepared by Diane Tanner University of North Florida

Chapter 46. Manufacturing Overhead Variances. Prepared by Diane Tanner University of North Florida. Two Overhead Variances. No one is responsible, We know why it exists. Controllable variance Who is responsible? Production Supervisor

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Prepared by Diane Tanner University of North Florida

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  1. Chapter 46 Manufacturing Overhead Variances Prepared by Diane Tanner University of North Florida

  2. Two Overhead Variances No one is responsible, We know why it exists. • Controllable variance • Who is responsible? • Production Supervisor • Managers are expected to control costs so they are not substantially different from budget • Volume variance • Who is responsible? • No one • Exists because the volume of production/sales is less/more than budgeted

  3. Overhead Variances Flexible Budget Applied Actual Actual Results Flexible Budget Static Budget Controllable Variance Volume Variance Spent more or less than allowed at actual production level More or less units were produced than planned Total Overhead Variance

  4. Overhead Variances Flexible Budget Actual Applied VOH rate x Actual units VOH rate x Actual units Variable Actual VOH + + + FOH rate x Actual units Actual FOH Budgeted FOH Fixed Controllable Variance Volume Variance Total Overhead Variance

  5. Applied Overhead Estimated VOH Estimated FOH Variable OH rate = Fixed OH rate = Estimated Units to Produce Estimated Units to Produce Overhead costs are applied to products and services using a predetermined overhead rate (POHR): Applied Overhead = [FOHR × Actual Units Produced] + [VOHR × Actual Units Produced]

  6. Flexible Budget Overhead • Represents the overhead allowed at the number of units produced • Variable overhead • Variable cost per unit x number of actual units • Fixed overhead • Total fixed overhead • Same at all levels of activity

  7. Behavioral Considerations Standard costs and variance analysis can: Provide very useful control measures Aid in performance evaluations Cause dysfunctional behavior among employees and managers

  8. The End

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