Ch. 15 - Direct & Overhead Variances

Question 1

For product costing purposes, the total overhead cost variance for the period (also called the total under/overapplied overhead) is equal to…

Answer 1

For product costing purposes, the total overhead cost variance for the period (also called the total under/overapplied overhead) is equal to the difference between actual overhead cost incurred and the standard overhead costs applied to production.

Question 2

Total overhead cost variance = ____________

Answer 2

Total overhead cost variance = total actual overhead cost – total applied overhead cost

Aka Total overhead cost variance = (total variable overhead + total fixed overhead) – (total overhead application rate x standard labor hours allowed)

Question 3

total variable overhead cost variance

Answer 3

The difference between actual variable overhead cost incurred and the standard variable overhead cost applied to production; also called over- or underapplied variable overhead for the period.

Question 4

variable overhead spending variance

Answer 4

The difference between actual variable overhead cost incurred and the flexible budget for variable overhead based on inputs for the period (e.g., actual direct labor hours worked).

variable overhead spending variance = actual variable overhead incurred – flexible budget for variable overhead based on inputs for the period

=(AQ x AP) – (AQ x SP)
=AQ x (AP–SP)

Question 5

variable overhead efficiency variance

Answer 5

The difference between the flexible budget for variable overhead based on inputs (e.g., actual labor hours worked) and the flexible budget for variable overhead based on outputs (i.e., standard allowed labor hours for units produced).

Simply put, this reflects the efficiency or inefficiency in the use of the activity variable used to apply variable overhead costs to products.

= Flexible budget for variable overhead based on inputs – flexible budget for variable overhead based on outputs

=(AQ x SP) – (SQ x SP)
=SP x (AQ – SQ)

Question 6

total fixed overhead variance

Answer 6

The difference between actual fixed overhead costs for the period and the standard fixed overhead costs applied to production based on a standard fixed overhead ­application rate; also called over- or underapplied fixed overhead for the period; this variance can be broken down into a fixed overhead spending variance and a fixed overhead production volume variance.

Question 7

fixed overhead application rate

Answer 7

A term used for product-cost­ing purposes; the rate at which fixed overhead cost is charged to production per unit of activity (or output).

Question 8

denominator activity level

Answer 8

The output (activity) level used to establish the predetermined fixed overhead application rate; generally defined as practical capacity; also called the denominator volume.

Question 9

denominator volume

Answer 9

The output (activity) level used to calculate the predetermined fixed overhead application rate; generally defined as practical capacity; also called the denominator activity level.

Question 10

theoretical capacity

Answer 10

A measure of capacity (output or activity) that assumes 100% efficiency; maximum possible output (or activity).

Question 11

practical capacity

Answer 11

Theoretical capacity reduced by normal output losses due to personal time, normal maintenance, and so on; the measure of capacity often recommended for estimating cost-driver rates under ABC and TDABC systems.

Question 12

budgeted capacity utilization

Answer 12

The planned (forecasted) output for the coming period, usually a year.

Question 13

normal capacity

Answer 13

The expected average demand per year over an intermediate term—for example, the upcoming three to five years.

Question 14

FASB ASC 330-10-30

Answer 14

GAAP financial reporting guidance regarding the determination of overhead allocation rates and the treatment of abnormal idle-capacity variances.

Question 15

resource capacity planning

Answer 15

Procedures used to ensure adequate but not excessive supply of capacity-related resources.

Question 16

fixed overhead production volume variance

Answer 16

The difference between budgeted (lump-sum) fixed overhead cost for the period and the standard fixed overhead cost applied to production (using the predetermined fixed overhead allocation rate); also called the production volume variance or the denominator volume variance.

production volume variance = budgeted fixed factory overhead cost – standard fixed overhead cost assigned to production

or

=SP x (denominator activity hours – SQ)

Question 17

Fixed overhead spending variances typically arise when…

Answer 17

fixed overhead spending variances typically arise when the budget procedure for the organization fails to anticipate or incorporate changes in spending for fixed overhead costs.

Question 18

total overhead spending variance

Answer 18

The difference between actual factory overhead cost incurred during a period and the flexible budget for overhead based on inputs (i.e., based on actual direct labor hours worked during the period).

Question 19

total flexible budget variance for overhead

Answer 19

The difference between the total actual overhead cost for a period and the flexible budget for total overhead based on output.

Total flexible budget variance for overhead = (actual fixed overhead + actual variable overhead) – (budgeted fixed overhead + [standard allowed direct labor hours x standard variable overhead rate per direct labor hours])

Question 20

If the net manufacturing cost variance is not considered to be material, then the appropriate treatment at year-end would be to……

Answer 20

If the net manufacturing cost variance is not considered to be material, then the appropriate treatment at year-end would be to close all temporary variance accounts on the balance sheet to COGS

If the net variance is favorable, then it is closed out by crediting (aka reducing) COGS, and debited if unfavorable.

Question 21

If the net manufacturing cost variance is considered to be material in amount, the net variance should be…..

Answer 21

If the net manufacturing cost variance is considered to be material in amount, the net variance should be allocated to the inventory and COGS accounts.

Question 22

random variances

Answer 22

Variances beyond the control of management, either technically or financially

Question 23

systematic variances

Answer 23

Variances that, until corrected, are likely to recur; also called nonrandom variances.

Question 24

prediction error

Answer 24

A deviation from a standard because of an inaccurate estimation of the amounts for variables used in the standard-setting process.

Question 25

modeling error

Answer 25

A deviation from the standard because of the failure to include all relevant variables or because of the inclusion of wrong or irrelevant variables in the standard-setting process.

Question 26

measurement errors

Answer 26

Incorrect numbers resulting from improper or inaccurate accounting systems or procedures.

Question 27

implementation error

Answer 27

A deviation from standard due to operator errors.

Question 28

statistical control charts

Answer 28

Charts that set control limits using a statistical procedure.

Question 29

For product-costing purposes, the total overhead cost variance for a period is equal to the difference between total actual overhead cost incurred and ______

Answer 29

-the product of the standard overhead rate and the standard allowed units of the cost-allocation base

standard overhead cost applied to production