Overhead Allocation CMAPart 1 6) At the same time as the actual costs are being paid, the cost accountants are getting reports from the factory floor about the number of units being manufactured. For each unit that is manufactured, the cost accountants apply 5 machine hours x $2 per machine hour, or $10 of fixed overhead to that unit. They do not worry about what the actual costs are at this pOint. When the accountants apply the fixed overhead, they debit Work-In-Process Inventory and credit Factory Overhead Control for $10 of fixed overhead for each unit manufactured. (The same thing is done for variable costs, as welL) This is done because as the year progresses, no one knows what the actual fixed costs incurred will be at the end of the year. But by applying this predetermined rate to production, the company can have a close estimate of what its total production costs are as the year goes on. During the year, 1,200,000 units are manufactured. Therefore, 1,200,000 x $10, or $12,000,000 of fixed overhead will be applied to the units produced. This applied overhead flows first to Work-In-Process inventory, then to Finished Goods Inventory as the units are completed, and finally, when the units are sold, to Cost of Goods Sold. 7) By the end of the year, the company has three amounts: Budgeted fixed overhead of $10,000,000; Actual fixed overhead of $11,000,000; and Applied fixed overhead of $12,000,000. The Total Fixed Overhead Variance is the Actual Fixed Overhead of $11,000,000 minus the Applied Fixed Overhead of $12,000,000, or $(1,000,000). Because $1,000,000 more overhead was applied than was actually incurred, the fixed overhead is over-applied by $1,000,000. 8) The company must make the year-end account balances reflect only the Actual fixed overhead incurred, because both the budgeted and the applied fixed overhead are just estimates. This Total Fixed Overhead Variance of $(1,000,000) right now is in the Factory Overhead Control account. Remember we said that as actual costs are paid, they are debited to the Factory OH Control account, and as the overhead is applied to production, the amount applied is credited to the Factory OH Control account. Therefore, the Factory OH Control account has been debited for $11,000,000 and credited for $12,000,000. It has a credit balance of $(1,000,000), which is also the Total Fixed Overhead Variance. That variance will be moved out of the Factory OH Control account by the accountants in the year-end adjusting entries they will make. 9) The Total Fixed Overhead Variance can be split into two different variances, to permit management to better analyze it and understand what caused it. Those two variances are: 10) Fixed Overhead Budget (or Fixed Overhead Spending) Variance, which is Actual Fixed Overhead Incurred minus Budgeted Fixed Overhead. Here, that is $11,000,000 - $10,000,000, whi � is $1,000,000. This is a positive number, because Actual Fixed Overhead Incurred was greater than Budgeted Fixed Overhead. This might be considered an Unfavorable variance, because actual costs were higher than planned. However, remember that actual production was 1,200,000 units, which was 200,000 greater than the 1,000,000 units that were planned. So actually, the fixed overhead cost per unit was less than planned, because the fixed overhead cost per unit actually produced was $11,000,000 .;. 1,200,000 units, or $9.16 per unit. 11) Fixed Overhead Production-Volume Variance. This variance is Budgeted Fixed Overhead minus Applied Fixed Overhead. Here, that will be $10,000,000- $12,000,000, which is $(2,000,000), a negative number. This variance tells management that more fixed overhead was applied than had been budgeted for. The reason more fixed overhead was applied than was budgeted for is, of course, because production was higher than planned. And that is a good thing. So a negative Fixed Overhead Production-Volume Variance is a Favorable variance. 12) These two variances - $1,000,000 Fixed Overhead Budget Variance plus $(2,000,000) Fixed Overhead Production-Volume Variance - total to $1,000,000, which is the Total Fixed Overhead Variance.
Posted on: Sat, 20 Sep 2014 17:50:06 +0000
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