Joined: 08 Aug 2011 Location: United States
Online Status: Offline Posts: 2
Posted: 08 Aug 2011 at 21:20 | IP Logged
according to becker: Production volume variance is the variance in an absorption costing system that measures the departure from the denominator level of activity that was used to set the fixed overhead rate.
need help to understand this sentence, anyone please?
For example:The variable overhead to produce one unit of chair is 1 hour @ $20 dollar per hour.
Facts:You produce 100chairs and consume 1.5 hours each since you hired unskilled people and pay them $10 an hour
A. Actual Cost
B. Actual hrs@ standard rate
C. Standard Cost (recorded on your book
100 chairs x 1.5hrs x $10 =$1,500
Actual hrs x Std. Rate 100 chairs x 1.5hrs x $20 = $3,000
Std Hrs x Std Rate for the actual ouput 100 chairs x 1hr x $20 =$2,000
A-B Spending Variance(Price variance) =($1,500) -Favorable because actual rate is lower
B-C Efficiency variance (volume variance) =$1,000 - Unfavorable. Unskilled laborer is inefficient because they used more hours than budgeted…Next time, hire me!
Total Variance = ($1,500)+ $1,000 =($500) Favorable. You spend $1,500 while you had budgeted $2,000 for 100 chairs..Well, still good job!
Joined: 25 Nov 2009 Location: United States
Online Status: Offline Posts: 196
Posted: 10 Aug 2011 at 11:24 | IP Logged
Thank you so much for the great explaination! Where does the Fixed Overhead come into play? i noticed that you've used Variance Overhead in your example.
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Topic: FOH Production Volume Variance,
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