Cost Accounting (14th Edition)

OVERHEAD VARIANCES IN NONMANUFACTURING SETTINGS 285
To calculate the production-volume variance, Lyco first computes the budgeted costallocation
rate for fixed setup overhead costs using the same four-step approach described
on page 266.
Step 1: Choose the Period to Use for the Budget. Lyco uses a period of 12 months (the
year 2012).
Step 2: Select the Cost-Allocation Base to Use in Allocating Fixed Overhead Costs to
Output Produced. Lyco uses budgeted setup-hours as the cost-allocation base for fixed
setup overhead costs. Budgeted setup-hours in the static budget for 2012 are 7,200 hours.
Step 3: Identify the Fixed Overhead Costs Associated with the Cost-Allocation Base.
Lyco’s fixed setup overhead cost budget for 2012 is $216,000.
Step 4: Compute the Rate per Unit of the Cost-Allocation Base Used to Allocate
Fixed Overhead Costs to Output Produced. Dividing the $216,000 from Step 3 by the
7,200 setup-hours from Step 2, Lyco estimates a fixed setup overhead cost rate of
$30 per setup-hour:
Budgeted fixed
setup overhead
=
cost per unit of
cost-allocation base
Budgeted total costs
in fixed overhead cost pool
Budgeted total quantity of
cost-allocation base
= $30 per setup-hour
=
$216,000
7,200 setup hours
Production-volume
variance for
fixed setup
overhead costs
=
Budgeted
fixed setup
-
overhead
costs
Fixed setup overhead
allocation using budgeted
input allowed for actual
output units produced
= $216,000 - (1,008 batches * 6 hours>batch) * $30>hour
= $216,000 - (6,048 hours * $30>hour)
= $216,000 - $181,440
= $34,560 U
During 2012, Lyco planned to produce 180,000 units of Elegance but actually produced
151,200 units. The unfavorable production-volume variance measures the amount
of extra fixed setup costs that Lyco incurred for setup capacity it had but did not use. One
interpretation is that the unfavorable $34,560 production-volume variance represents
inefficient use of setup capacity. However, Lyco may have earned higher operating income
by selling 151,200 units at a higher price than 180,000 units at a lower price. As a result,
Lyco’s managers should interpret the production-volume variance cautiously because it
does not consider effects on selling prices and operating income.
Decision
Point
How can variance
analysis be used in
an activity-based
costing system?
Overhead Variances in Nonmanufacturing
Settings
Our Webb Company example examines variable manufacturing overhead costs and
fixed manufacturing overhead costs. Should the overhead costs of the nonmanufacturing
areas of the company be examined using the variance analysis framework discussed in
this chapter? Companies often use variable-cost information pertaining to nonmanufacturing,
as well as manufacturing, costs in pricing and product mix decisions. Managers
consider variance analysis of all variable overhead costs when making such decisions and
when managing costs. For example, managers in industries in which distribution costs
are high, such as automobiles, consumer durables, and cement and steel, may use standard
costing to give reliable and timely information on variable distribution overhead
spending variances and efficiency variances.
Consider service-sector companies such as airlines, hospitals, hotels, and railroads.
The measures of output commonly used in these companies are passenger-miles flown,
Learning
Objective 8
Examine the use of
overhead variances in
nonmanufacturing
settings
. . . analyze
nonmanufacturing
variable overhead costs
for decision making and
cost management; fixed
overhead variances are
especially important in
service settings