Illustration of Overhead Variance Analysis
Again for intentions of our demonstrations in overhead variance analysis, we will suppose the given basic data for company in the production of a radio cassette model Stereo F262 as:
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Budget for December 2003;
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Shs.
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Fixed Overheads
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11,480
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Variable Overheads
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13,120
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Labour Hours
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3,280 hours
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Standard Hours of Production
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3,280 hours
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Actual Results for December 2003
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Shs.
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Fixed Overheads
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12,100
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Variable Overheads
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13,930
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Actual Labour Hours
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3,150/hours
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Standard Hours of Production
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3,280 hours
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Note
Based upon our budget above that the predetermined overhead absorption rates can be computed as given as:
F.O.A.R = Budgeted Fixed overhead/ Budgeted activity level
= Shs.11,480/3,280 std hours
= Shs.3.5/h
V.O.A.R = Budgeted Variable overhead/ Budgeted activity level
= Shs.13, 120/3,280 std hours
= Shs.4/h
Total OAR = F.O.A.R + V.O.A.R
= Shs.3.5/h+ Shs.4/h
= Shs.7.5/h
This is also notable from our budget such the budgeted standard hours and the budgeted labour hours of production are the similar: it is the normal planning basis that assumes as the actual labour hours will be the similar as the standard hours actually produced. It would imply such efficiency is as initially planned hence no efficiency variances would arise. Conversely, this is rarely the case in practice and thus the efficiency variances in overhead variances analysis.