Overhead Variances - Lesson 1 - YouTube

OK, now let's talk about the ugly variances, which are the overhead variances.

And this is something that even though you just studied it in school, you probably just

prayed that the exam wouldn't be tough, and you hopefully got through the exam.

What we're looking at here with overhead...

Now remember with overhead we said we've got direct materials, direct labor and factory

overhead.

With overhead we have spending, efficiency, volume.

Something that's important to understand is all of your overhead variance analysis is

done using the flexible budget equation.

What was the flexible budget equation?

Total cost equals fixed plus variable times X.

So as we go through and we look at these, we're gonna be looking at fixed plus variable

times X, where X is gonna be changing as we go across.

So it's important to kinda start out with a big picture.

It'll take a little bit of time as we go over it for it to start to sink in and make sense,

but as we start out, we're gonna be looking at the flexible budget equation, flexible

budget equation.

So if you look back at those sample numbers I gave you on about page, I don't know, five

or so, it says, budget to actual.

For example, budgeted overhead costs were fixed rent is $400,000 dollars.

Now remember we said we budgeted 100,000 hours, 50,000 units at 2 hours a unit, 100,000 hours.

So let's say direct labor hours is our application base.

Remember how we applied overhead into production.

We applied it based on a predetermined overhead rate, so our application rate was direct labor

hours.

That was our base.

So in looking at this, we have fixed rent, $400,000.

But we said, OK, if you wanna break it out, if we're gonna pay $400,000 dollars for rent,

but we think we're gonna be using 100,000 hours, that's like $4 dollars per hour times

100,000.

That's what we should be using.

Variable electricity is a dollar, so we thought variable is a dollar, but we assumed it's

100,000 direct labor hours is $100,000 dollars.

So notice that we're figuring our total overhead as $400,000 for rent and another $100,000

for variable.

That gives us $500,000 dollars.

So we're sitting here saying, my overhead is about $500,000, $400,000 in rent, fixed,

$100,000 more or less in electricity based on 50,000 units, budget, 2 hours a unit, there's

$100,000.

Now your flexible budget equation is F-B-E, that's flexible budget equation, and it says

there, four times 100,000 plus a dollar at X.

Note, X is actual production, actual hours, or actual production, standard hours allowed.

That's what we're gonna be using.

Now the other thing they give us is actual, and with actual we have fixed rent of 390,

variable electricity of 1.01 at 97,000 hours.

Now notice a couple of things.

First of all, fixed rent was 390, so it wasn't as fixed as we thought.

We got a rent reduction.

That you know is gonna be favorable, positive.

Our electricity, we budgeted a dollar an hour.

It's actually gonna cost us a dollar one, 1.01.

Now we also budgeted 100,000 hours, but remember we actually used 96,000, and standard allowed

for actual was what?

I'm sorry, we actually used 97,000, and standard allowed for actual was 96.

So our actual hours we used was 97,000, even though we budgeted a dollar and it was 100,000,

'cause this was 50,000 at 2 hours a unit.

So those are a couple of the numbers that are gonna be really important in setting this

up.

Before we go on, look at the box again about budget, actual and standard allowed.

So lemme set those up one more time.

Way over here, just so we remember, we had a budget of 50,000 units at 2 hours a unit

is 100,000 direct labor hours.

We had actual of 48,000 at 2.01, which was 97,000 direct labor hours.

Our standard allowed for actual is 48,000 actual, times standard allowed budget, 2,

is 96,000.

We're gonna be using all of these in our variance analysis, OK?

So again, I just want you to understand the basics of where they came from.