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22-- Traditional Variance Calculations for Monitoring Cost and Efficiency, Part 2 - YouTube
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I'm Larry Walter this is principles of
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accounting dot-com
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chapter xxii and in this module we are
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continuing our consideration of variance
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analysis this time we're going to look
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at the overhead variances now recall
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that overhead has both variable and
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fixed components as a result variance
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analysis for overhead is split between
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variances related to variable overhead
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and variance is related to fixed
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overhead remember when more spent on
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actual variable factory overhead that is
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applied based on the standard
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application rate the result is called
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under applied overhead and it produces
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unfavorable variances when less is spent
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than is applied the balance represents
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overapplied overhead or favorable
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variances differences are transferred to
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variances accounts as they work material
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and labor and we're going to look first
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at the variable overhead this
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illustration shows how we're spending
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money for overhead on wages indirect
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material in other words supplies and so
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forth as we credit those accounts and
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you've seen this in a prior chapter
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we're debiting the factory overhead
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account to capture actual cost in an
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overhead account then we apply that
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overhead to production we credit factory
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overhead and we debit work in process
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for the standard amount of variable
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overhead we would debit the unfavorable
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variance account this is if it's an
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unfavorable variance that is we've spent
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more than we anticipated under standard
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notice in the middle the factory
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overhead account should be zeroed out at
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the end of the period that is we should
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have charged to overhead all of the
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amount in the factory overhead account
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if we turn this around and look at a
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slide for favorable variances you can
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see in the middle we've applied at
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standard more than we've accumulated at
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actual so the z Z the variance in this
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case we're going to need to close that
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out by crediting a favorable variance
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account that's the total picture for
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variable overhead but it can be divided
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into spending components and it can be
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divided into efficiency components just
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as we did for material and labor so a
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variable overhead spending variance
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would be a variance that reflects the
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difference between actual
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variable overhead and standard variable
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overhead associated with the actual
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units of the application base and the
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overhead efficiency variance is a
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variance that reflects the level of
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efficiency associated with the
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application of the variable overhead to
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production and so we're going to return
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to blue rail manufacturing this again is
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the illustration used in the book and
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remember that it was estimated that
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variable factory overhead should be
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equal to ten dollars per direct
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labor-hour that's the model that's the
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standard that we set ten dollars for a
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labor hour during August one hundred and
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five thousand was actually spent on
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variable overhead items and so our 3400
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units of output we expected three hours
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per unit so our standard hours to
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achieve the output was ten thousand two
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hundred hours that's our application
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base for overhead at ten dollars an hour
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means our standard cost for variable
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overhead was a hundred and two thousand
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but we spent a hundred and five thousand
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and so we have three thousand of
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unfavorable variance to deal with let's
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look closer at these variances using a
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graphic in this graphic we can see that
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we have three thousand of unfavorable
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variance if we break this down our where
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we get an entirely different picture we
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actually have a twenty thousand dollar
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variable overhead spending variance
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that's favorable in nature and we have a
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twenty three thousand dollar unfavorable
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variable overhead efficiency variance in
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the case of the overhead spending
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variance we actually spent one hundred
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and five thousand but if we look at the
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application base of hours we had 12,500
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hours at a standard rate of ten dollars
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for that number of hours we would have
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spent a hundred and twenty five thousand
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so we get a variable overhead spending
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variance of twenty thousand that's
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favorable but that compares poorly to
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the hundred and two thousand that should
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have been spent the standard cost as
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compared to that same hundred and twenty
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five thousand this is recorded with the
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journal entry here we're going to debit
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work in process for the hundred and two
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thousand standard cost we're going to
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credit one hundred and five thousand to
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close out the actual amount in factory
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overhead and the differences get applied
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to our overhead efficiency and spending
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variances again debit unfavorable and
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credit favorable the variable already
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efficiency variance may reflect
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efficiencies or any fish and
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he's experienced with the bass used to
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apply overhead in our example the number
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of hours was run up because of
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inexperienced labor let's next turn our
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attention to the fixed overhead
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variances the actual fixed factory
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overhead oftentimes shows little
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deviation from budget the reason being
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that many fixed costs are truly fixed
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they're set by contract or some other
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agreement but there can be variations
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and we can divide the analysis of those
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variations into a fixed overhead volume
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variance which compares the budgeted
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fixed overhead to the fixed overhead
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that is applied to production based on
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standard fixed overhead per unit and
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fixed overhead spending that compares
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actual fixed overhead to the budgeted
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amount of fixed overhead and so let's
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reflect on blue rail one last time blue
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rail had budgeted total fixed overhead
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of 72,000 but only 70,000 was spent so
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that's positive but when we look at this
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closer blue rail had planned to produce
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4,000 systems therefore the planned
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fixed overhead was $18 per rail that is
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the 72,000 that we thought we would
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spend divided by the 4,000 units the
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fixed overhead allocation rate therefore
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is $6 per hour $18 per unit divided by 3
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labor hours per unit and so when we look
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at this graphically we spent 70,000 the
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standard cost however that we would
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apply would be the 10200 standard hours
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for the production that we achieved
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times the $6 per hour standard
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application rate for fixed overhead b60
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1200 so that yields an 80 $800
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difference or unfavorable variance that
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we need to divide further as it turns
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out we had a $2,000 favorable spending
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variance that is we spent 70,000 when
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72,000 was the budgeted amount but we
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really got shot out of the saddle here
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on the fixed overhead volume variance we
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didn't produce the 4,000 units we
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anticipated we only produce 3,400 units
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and so when it came to applying the
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fixed overhead to production we produced
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a very unfavorable volume variance you
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know we didn't spend as much as we
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thought but then we certainly didn't
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produce nearly as much as we thought so
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by the time we get through with the
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total analysis we've got 8800 of
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unfavorable overall fixed overhead
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variances and here's the entry
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for that we're going to charge working
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process for the standard amount
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associated with production we produced
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will credit factory overhead declare out
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the 70,000 that account and the
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differences are applied to our volume
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variance and our overhead spending
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variance and so all of this information
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is incorporated in the ledger management
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has to assess it very carefully to
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determine its cause and effects and what
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remedial actions are necessary if you
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look at other books you may see two
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variance method a three variance method
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of four variance method there's many
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thoughts and ideas about the best way to
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analyze variances related to overhead
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I've elected to use of four variance
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method portions of these can be combined
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to come up with the two variance method
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for example any that what's important to
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see is that just like you analyzed your
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efficiency related to labor and
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materials you would do the same thing
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with respect to your overhead and with
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regard to the level of spending you
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would do the same analysis you would
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apply the same sort of thought processes
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to overhead that you do to labor and
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materials
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