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972 Part 6 Control in a Management Accounting System | EM
Compute and
interpret fixed
overhead cost
variances. 6
Fixed Manufacturing Overhead
Variances in Cost Centers
The final product cost to control is fixed manufacturing overhead. Fixed manufacturing
overhead includes such costs as rent, insurance, depreciation, staff and
supervisor salaries, and property taxes. This cost is unique among the product
costs. Because direct materials and direct labor are generally characterized as
variable costs similar to variable manufacturing overhead, the process of “controlling”
fixed manufacturing overhead is different from the other costs we’ve
studied in this chapter. Nevertheless, fixed manufacturing overhead is a very significant
cost in most organizations. 10
Measuring and Controlling Fixed Manufacturing
Overhead Costs
Reporting on how well fixed manufacturing overhead costs are controlled is actually a
fairly straightforward process. Because these costs are fixed in total, measuring variances
around these costs is simply a matter of comparing the original budget with the total fixed
overhead costs that were actually spent. To demonstrate, let’s return once more to our
Sunbird Boat Company example. Similar to the variable manufacturing overhead budget
established at the beginning of the year, Sunbird’s management team and accountants also
created a fixed manufacturing overhead budget. Then, in order to subsequently allocate
these costs to boats as they are produced during the year, Sunbird created standard fixed
manufacturing overhead rates using an approach similar to that used to create standard
variable manufacturing overhead rates. This process is shown below.
Annual Divided by the Fixed
Budgeted Total Standard Direct Manufacturing
Costs Labor Hours Allowed Overhead Rate
Property taxes . . . . . . . . . . . . . . . . . . . . $ 8,000 8,400 hours = $ 0.95 per hour
Insurance . . . . . . . . . . . . . . . . . . . . . . . . 4,000 8,400 hours = 0.48 per hour
Depreciation on the plant . . . . . . . . . . . . 60,000 8,400 hours = 7.14 per hour
Supervisors’ salaries . . . . . . . . . . . . . . . 96,000 8,400 hours = 11.43 per hour
Fixed manufacturing overhead . . . . . . . . $168,000 $20.00 per hour
As you compare this chart to the similar chart we created earlier for variable manufacturing
overhead, be sure to bear in mind that we’re dealing with fixed costs here.
Similar to the $7.50 variable manufacturing overhead rate created earlier, the $20.00
fixed manufacturing overhead rate above will be used by Sunbird’s accountants to allocate
manufacturing overhead to production (again, remember that we discussed the
overhead allocation process previously in Chapter 16). Hence, Sunbird applies $1,600
($20.00 80 hours) in fixed manufacturing overhead costs to each 15-foot boat produced.
In addition, as you remember from the previous section, Sunbird uses the variable
manufacturing overhead rate of $7.50 to apply $600 ($7.50 80 hours) to each
boat produced. Sunbird also uses the $7.50 rate to measure expected variable
10 Sometimes students are confused by the idea that fixed costs need to be controlled or managed. Fixed costs should not
change, right Wrong. Fixed costs are not constant; they are simply fixed with respect to operating activity in the organization
as measured by cost drivers such as production volume or direct labor hours. Fixed costs can, and often do, change
due to issues unrelated to levels of operating activity.