48 Compute and Evaluate Overhead Variances

Recall that the conventional expense of a product consists of not just materials and labor however also variable and fixed overhead. It is likely that the quantities established for standard overhead costs will differ from what actually occurs. This will result in overhead variances.

You are watching: Under a standard cost system, the journal entry to record direct labor includes ________.

Determicountry and Evaluation of Overhead Variance

In a typical cost device, overhead is used to the products based upon a standard overhead rate. This is similar to the predetermined overhead rate supplied formerly. The typical overhead rate is calculated by splitting budgeted overhead at a given level of manufacturing (well-known as normal capacity) by the level of task compelled for that certain level of manufacturing.


Units of output at 100% is 1,000 candy boxes (units). The conventional overhead price is the complete budgeted overhead of ?10,000 split by the level of activity (direct labor hours) of 2,000 hrs. Notice that resolved overhead remains continuous at each of the manufacturing levels, yet variable overhead transforms based upon unit output. If Connie’s Candy just produced at 90% capacity, for example, they should intend complete overhead to be ?9,600 and a traditional overhead rate of ?5.33 (rounded). If Connie’s Candy created 2,200 units, they must intend full overhead to be ?10,400 and also a conventional overhead price of ?4.73 (rounded). In addition to the complete conventional overhead rate, Connie’s Candy will want to understand the variable overhead prices at each activity level.

Using the versatile budgain, we deserve to recognize the traditional variable cost per unit at each level of manufacturing by taking the total meant variable overhead separated by the level of task, which deserve to still be straight labor hours or machine hours.


Factoring out actual hrs functioned, we have the right to rewrite the formula as


Connie’s Candy likewise had this actual output information:


Connie’s Candy also had actually this actual output information:


Factoring out conventional overhead price, the formula can be created as


Connie’s Candy likewise had the complying with actual output information:


Connie’s Candy also had the following actual output information:


For example, Connie’s Candy Company kind of had actually the following information easily accessible in the flexible budget:


The variable overhead price variance is calculated as (1,800 × ?1.94) – (1,800 × ?2.00) = –?108, or ?108 (favorable). The variable overhead effectiveness variance is calculated as (1,800 × ?2.00) – (2,000 × ?2.00) = –?400, or ?400 (favorable).

The total variable overhead cost variance is computed as:

( extTotal Variable Overhead Cost Variance=left(–?108 ight)+left(–?400 ight)=–?508phantom ule0.2em0ex extorphantom ule0.2em0ex?508phantom ule0.2em0exleft( extFavorable ight))

In this instance, 2 facets are contributing to the favorable outcome. Connie’s Candy offered fewer straight labor hours and also less variable overhead to develop 1,000 candy boxes (units).

The exact same calculation is shown as complies with in diagram format.


What is the typical variable overhead rate at 90%, 100%, and 110% capacity levels?


90% = ?315,000/14,000 = ?22.50, 100% = ?346,000/16,000 = ?21.63 (rounded), 110% = ?378,000/18,000 = ?21.00.

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The XYZ Firm is bidding on a contract for a brand-new airplane for the army. As the administration team is going over the bid, they pertained to the conclusion it is as well high on a per-plane basis, but they cannot uncover any kind of prices they feel deserve to be reduced. The information from the army states they will purchase between 50 and 100 planes, but will certainly more most likely purchase 50 planes fairly than 100 planes. XYZ’s bid is based upon 50 planes. The controller says that they base their bid on 100 planes. This would spcheck out the fixed prices over more planes and minimize the bid price. The reduced bid price will increase considerably the possibilities of XYZ winning the bid. Should XYZ Firm keep the bid at 50 planes or boost its bid to 100 planes? What are the pros and cons to keeping the bid at 50 or increasing to 100 planes?

Key Concepts and Summary

Tbelow are two sets of overhead variances: variable and fixed.The variable variances are caused by the overhead application rate and also the activity level versus which the rate was used.The variable overhead price variance is the difference between the actual variable manufacturing overhead and the variable overhead that was meant offered the variety of hours operated.The variable overhead efficiency variance is driven by the difference between the actual hrs functioned and also the conventional hrs expected for the devices produced.There are two solved overhead variances. One is resulted in by spfinishing as well a lot or too bit on fixed overhead. The various other is resulted in by actual production being above or below the intended manufacturing level.