Albrecht 19.pdf - Marriott School

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974 Part 6 Control in a Management Accounting System | EM
volume variance
The difference between
the expected (or
budgeted) production
output established at the
beginning of the reporting
period and the actual
production output. This
difference is then
converted into a dollar
number by multiplying it
by the standard fixed
manufacturing overhead
costs per unit.
CAUTION
Generally, one would expect little change in fixed costs unless a decision is made by
management to make a direct change to a cost item. Hence, buying or selling property,
changing the insurance contract, adjusting the depreciation schedule, or personnel
changes will affect the actual fixed costs incurred. Apparently, Sunbird’s insurance contract
didn’t change. There were some differences in property taxes (likely due to a tax
rate increase by the local government) and salaries (perhaps a shift in personnel serving
in management roles). It also appears that Sunbird saved a little money on supervisor
salaries, perhaps due to staff changes in the company. The largest impact on the fixed
overhead budget variance came from depreciation. This variance should be investigated.
Perhaps the company accountant made a change to the depreciation method, or perhaps
more expensive equipment was acquired during the year. It’s important to understand
that variances do not provide answers in the management process. Variances signal questions
that need to be asked by management.
Remember that overhead costs are applied on
the basis of standard direct labor hours
allowed, and not on the actual direct labor
hours used. Sunbird will apply $1,600 in
fixed manufacturing overhead to each boat
produced regardless of how many hours are
actually used to produce the boat.
FYI
Managers who understand how to use the
volume variance as a performance measure
know that this dollar figure doesn’t really
indicate the volume of costs flowing into or
out of their organization. They know that if they
divide this number by the predetermined fixed
manufacturing overhead rate per unit, they can
then see exactly how many units were actually
produced above or below the expected level
of production.
Volume Variance. The $8,000 unfavorable volume variance shown in the
illustration above is a variance unlike any other we’ve studied in this chapter.
Every variance studied thus far has been an input variance; that is, it has been either
a variance on how much was spent on the input (materials price, labor rate,
variable overhead spending, fixed overhead budget) or a variance on how much
of the input was used (materials quantity, labor efficiency, variable overhead efficiency).
The volume variance is an output variance and measures the difference
between expected and actual production volumes.
In the case of Sunbird Boat Company, you will recall that at the beginning of
the year management expected to produce 105 15-foot boats. However, at the end
of the year the company had only produced 100 boats. This is an unfavorable volume
variance, and the amount of that variance is five boats. The problem in a standard
costing system is that you can’t debit or credit “five boats” into the accounting
system. To record this variance requires that the difference between expected and
actual output volume be changed into a dollar amount. This is done using the fixed
manufacturing overhead rate of $20.00 per direct labor hour. Based on the production
standards used to establish its standard costs, Sunbird allocates $1,600 (80 standard direct
labor hours allowed $20.00 per direct labor
hour) in fixed manufacturing overhead
to each boat produced. (Remember that
Sunbird established the $20.00 rate based on
an expectation of producing 105 boats and
uses the rate to allocate the budgeted fixed
costs of $168,000.) Because Sunbird only produced
100 boats, it only allocated $160,000
($1,600 100 boats). In other words, Sunbird
underapplied its fixed manufacturing
overhead costs by $8,000 ($168,000
$160,000), which results in an unfavorable
volume variance of $8,000. Another way of
calculating this volume variance would be to
simply multiply the unfavorable volume difference
of five boats by the $1,600 per-boat
application rate. This fixed overhead volume
variance can be thought of, roughly speaking,
as underapplied fixed manufacturing
overhead costs (we discussed this concept
earlier in Chapter 16). Because Sunbird actually
produced fewer boats than originally expected
when it set up the $1,600 application
rate, not enough fixed costs were applied to
production during the year.