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 Topic: Just 1 OH variance question ( Topic Closed)
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JLcpa
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| Posted: 12 Feb 2010 at 00:02 | IP Logged
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Hi, I am pretty clear on the variance chapter incl OH variance except this 1 question:
Under the three-variance method for analyzing manufacturing OH, which of the following is affected when the actual level of output for the period differs from the budgeted level?- Spending variance, Efficiency variance, Production-volume variance
Ans is Spending variance- not affected
Efficiency & Production-volume affected
I agree that Spending will not be affected & Production-volume will be affected.
But Efficiency may/ may not be affected.
According to Gleim, since expected qty is used to determine efficiency variance, difference in the output level will affect Efficiency variance.
Efficiency variance= (Expected Qty x Std Rate)-(Actual Qty x Std Rate)
According to me, if OH are based on:
1. units of output, then the Actual Qty= Expected Qty, so there will be no efficiency variance i.e. it will not be affected due to changes in output levels
2. a driver (like labor hours), then Actual Qty will be different from Expected Qty only if there is a difference between the std labor hours used for OH application and labor hours in actual.
Example: Budgeted o/p of 10000 units. VOH assigned on the basis of direct labor hours. 1 unit takes 2 hours & 1 hour costs $5. Actual o/p of 8000 units. 1 unit took 2 hours & 1 hour cost $6
Efficiency variance= [(8000x2)x5]-[(8000x2)x5] = 0
The only time efficiency variance will be affected is when the underlying driver changes i.e. instead of taking 2 hrs, 1 unit took 3 hrs.
Does anyone agree with my reasoning?
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mits07
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| Posted: 12 Feb 2010 at 09:40 | IP Logged
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Hi JLcpa, I think the answer is right because spending variance is more related to cost. The less you spend is better, meaning if your actual cost is less than your budgeted cost. But, both volume and efficiency variance is related to activity level. Meaning, if you produce more or less than expected, than that would affect your volume and efficiency. I can't memorize formula, rather I try to understand the formula. For example, your variable efficiency variance is the difference between actual hours worked at std rate and std hours allowed at std rate. Basically, your std rate here is same but your difference is the actual hours vs std hours....I am not sure if I expalined it good, but that's how I understand it. Also, your volume is difference in your actual hours worked at actual rate vs your budgeted fixed oh and budgeted voh (std hours allowed * voh rate). Again, it has to do with how many hours your worked vs your budgeted hours. Goodluck...when are you taking your BEC exam?
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JLcpa
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| Posted: 12 Feb 2010 at 11:32 | IP Logged
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Mits, thats exactly my point. You have written "variable efficiency variance is the difference between actual hours worked at std rate and std hours allowed at std rate"
If you see my example above, you will see that although output changed in terms of units, the actual hours worked and the standard hours worked remained the same, because we consumed the same no. of hours per unit.
I hope you are not confusing budgeted hours with std. hours. Budgeted hours would have been 10000 units x 2 hr p.u= 10000 hours. Standard hours are std hours needed for actual units. i.e. 8000x2.
Thus efficiency variance will not be affected just bcoz of a change in output, unless there is also a change in the driver.
And VOH do not necessarily have to be based on labor hours. They could be based on units produced as well; in which case, again the Efficiency variance will not be affected.
Do you agree?
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Jas, Jersey City, NJ
AUD- 18 Nov 2009- 86
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mits07
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| Posted: 12 Feb 2010 at 11:48 | IP Logged
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Hey, I am not sure about your example but let's say, that actual hours worked was 10,000 DL hours and actual rate for DL is $8 and std hours worked allowed is 9,000 DL hours and std DL rate is $5, than our DL Efficiency variance would be $5,000 Unfavorable? Do you agree?
I used actual hours 10,000 DL hrs at std rate $5 = 50,000
Std hours allowed 9,000 DL hours at std rate $5 = 45,000
DL Efficiency Variance = 5,000 Unfavorable.....Because the actual hours worked is different than std hours worked. Here, the activity level of output is your actual hours vs std hours. I do not understand when you said actual hours = std hours. I am confused. Where did you get this question from? Which material?
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