Overhead Variances: Class Questions - Review 2 - YouTube

Number five, now we get to work with some numbers.

Last sentence first, it says rose X3 unfavorable variable overhead efficiency variance was?

Let's read that again.

Their unfavorable variable overhead efficiency variance.

Unfavorable variable overhead efficiency variance, that's this, efficiency, and they're saying

it's unfavorable, negative.

That means this has got to be bigger than this.

Now remember, this variance is all what?

It's all variable anyway, right?

There's no fixed.

Fixed is the same; it's only variable.

They're saying variable.

They could have just said efficiency variance.

You should know it's variable.

Volume variance, you know is fixed.

This one is both, so you'd have to figure it out as the fixed or the variable part.

Here, this is all variable.

Now what I'm going to do is I'm going to clean it up and we're going to try to throw some

numbers in.

This is kind of our test to see if it makes sense.

If it does, awesome; if it doesn't, we'll go back and we'll do it a couple more times.

And then also just kind of hope that this doesn't show up in too much detail.

Let's just kind of pray.

Here we go.

It says, The following information pertains to Roco's X3 manufacturing operations.

We have standard direct manufacturing labor hours per unit, 2; actual direct manufacturing

labor hours, 10,500, so that's actual hours.

Number of units produced, 5,000, that's actual.

Standard variable overhead per standard direct manufacturing labor hour.

Standard variable overhead per what?

Per direct labor hour.

What is our base?

Our base is labor hours, and that's $3 an hour.

Actual variable overhead is $28,000.

That's why, as I said earlier, what I like to do is I always like to do what?

I always like to start with my actual.

Why?

Because actual's given.

So, the actual variable overhead.

We're looking only at variable in this case.

Here's fixed, we don't know; here's variable.

Our variable overhead is $28,000.

Now when you look at the overhead, $28,000, that's based on what?

That's based on actual direct labor hours of 10,500.

Therefore, if I wanted to break it out, $28,000 which is ... $28,000 divided by what?

$28,000 divided by 10,500 equals $2.66, so $2.66.

To calculate the $28,000, it's really what?

It's really 10,500 actual, or let's do it the other way since we did the cost.

$2.66 x actual which is 10,500.

It's 10,500 hours at $2.66 per hour.

How did I get it?

I just took $28,000.

I didn't have to do this, but I'm going to show you why because it's easier to compare

a little bit later.

Now, as I move across, let's see what other numbers they gave us.

They gave us that our standard overhead was $3.00.

Remember, it's going to be actual at actual.

This is my flexible budget, it's going to be standard allowed for actual, it's going

to be standard allowed for, what, standard allowed for actual and then over here, boom,

same thing.

These numbers are going to be the same.

Why?

Because the difference is fixed which the didn't ask us.

They're asking us for this difference which you know is going to be different because

this variance efficiency's all variable, this variance volume is all fixed.

What I need to figure out is standard allowed for actual.

How much is standard direct manufacturing labor hours per unit?

Two.

How much is actual production?

5,000.

Therefore, this is going to be 5,000 at 2 which is 10,000.

This is also going to be 10,000.

Let's go through it again.

We've got actual, $28,000, which I showed you was 10,500 at $2.66.

They gave me the 10,500, I just divided that to get $2.66, just so you could compare.

When we set up we said, "Hey, we budgeted $3.00."

This is $3.00, variable overhead per direct manufacturing labor hours.

Our base was $3.00 an hour and we budgeted 10,000.

It should be $30,000.

Here we've got actual of $28,000 which means it actually cost $2.66, that's good, but it

took 10,500 hours.

Let's do that, compare, this is flexible budgeted actual, so take actual here, but this is standard

allowed for actual, boom.

That gives us $31,500.

This is going to be standard allowed based on what got applied, standard allowed.

Over here, it's going to be 30,000 and this is also going to be 30,000.

Obviously this is our volume variance which is zero, because it's not variable.

It's all fixed.

This is going to be our efficiency variance which is all variable, so it's going to be

$1,500 unfavorable because this is bigger than this.

This, they didn't ask for, is going to be 28, 29, 30, 31, 3,500 and in looking at this

$3,500, since this is bigger than this, this is favorable.

This is the variable.

This would be our spending variance.

What happened?

We actually spent $28,000.

We basically, based on our budget, based on actual, should have spent $31,500.

That was a good job.

Based on flexible budgeted actual, $31,500, but we only did what?

We basically applied, boom, boom, $30,000.

We were less efficient.

Why?

Because it should have taken us 10,000 hours.

Remember, we budgeted 10,000 hours?

We sat down and we said two hours, 5,000.

Two hours was standard, 5,000 was actual production so that's standard allowed for actual.

It took 10,000.

It should have taken us 10,000.

It took us 10,500, that's 500 hours at $3 is the $1,500.

As you move over, this, again, is the volume variance which, there's no variable volume

difference.

It would have been all fixed, but they didn't ask us for the fixed.

One more time because I know, if you're like me when you put numbers to it, that's when

it starts to make sense.

Starting over here, actual.

What's our actual?

$28,000.

How did you get it?

They just got you a bill.

They gave you a bill and they said, "Hey, we spent 10,500 hours and it cost us $2.66."

For what?

For electricity.

This a variable overhead, variable overhead, electricity, rent, whatever the ... Not rent,

rent's fixed.

Electricity, air conditioning, heat, something that the more hours, the more cost.

It's not fixed, it changes.

So $2.66.

We budgeted $3.00.

That's good, that's why it's going to be favorable.

The same hours because we use actual, actual.

This is actual, this is flexible budget, close to actual, use flexible budgeted actual.

That's where this came from, $3,500 favorable but they didn't ask for the spending variance.

Then moving on, we actually used 10,500 hours and $3.00 was our budget.

We should have used $3.00 at 10,000 which is 2, standard allowed, for actual production.

Therefore, it's off by $1,500.

That is $1,500 unfavorable.

Again, I realize it's a tricky area.

I realize it's an area that most of us never understood before my lecture.

After watching it a few times, hopefully it makes a little bit more sense.

In a minute, we'll move on to some more fun stuff.