Variable Overhead Variance - Essay Example

Introduction: Teva sandals a company which sells sandals for water sports has undertaken variance analysis to achieve the profits planned while controlling the manufacturing overheads spending. Hence, 1. Variable overhead analysis for spending and efficiency,2. Meaning and possible causes of such variances,3. Explanation to the management and4. Conclusion is considered to arrive at a solution.Variable overhead analysis for spending and efficiencyVariable overhead spending variance = (Actual Machine Hours x Flexible budget Rate/hour) - Actual resultant overhead.

Actual Machine Hours = 67,500 (given), Standard rate/ hour = $30 (given) &Actual resultant overhead = $1,950,000 (given).Variable overhead spending variance = (67,500 x $30) - $1,950,000 = $2,025,000 - $1,950,000 = $75,000 (Favorable).Variable overhead efficiency variance = (Flexible budget variable manufacturing overhead cost) – (Actual machine hours worked x Standard variable manufacturing overhead cost per machine hour)Flexible budget variable manufacturing overhead cost = 1,800,000Standard variable manufacturing overhead cost per machine hour = $30 (given) Actual machine hours worked = 67,500 (given).

Thus, Variable overhead efficiency variance =1,800,000 – 67,500 x $30 = 1,800,000 – 2,025,000 = (225,000) (Adverse)Variable manufacturing overhead variance = 75,000 – 225,000 = 150,000 (adverse).Meaning and possible causes of such variancesSpending variance means the difference between the budgeted variable overhead for the production purposes and the actual variable overhead incurred in the processing. In this case, the variance is favorable implying that the actual expenditure incurred is lesser than that budgeted.

Efficiency variance means the variable overhead cost arising out of the difference in the budgeted machine hours and the actual machine hours worked out. In this case, this variance is adverse implying that more number of machine hours was put into use than what was planned.As earlier explained, the possible causes for these adverse variable manufacturing overhead variance is over utilization of the machine hours than what was budgeted that it negates even the favorable effects of lower expenditure for such manufacture.

Explanation for unfavorable variance:In order to reduce the cost of expenditure for the manufacturing purposes, some direct materials are sourced from local sources which may not be of standard quality thereby increasing the time spent on machine hours to match the required sandal design specifications. Hence, the management needs to check in for quality of the raw material purchased rather than only going by price considerations so that the overall cost of manufacturing overhead reduced and even the quality of the finished product would be even better than what is marketed now.

Conclusion:It is observed that the raw material purchases are below the budgeted standards thereby raising doubts on the quality of the raw material procured and as such, work on them becomes tedious and more time consuming in terms of machine hours. Care should be taken while selecting the right type of raw material so that in the coming months, there is no occurrence of variance. Book Bibliography:Jain S.P. & Narang K.L. (2006). Standard Costing and Variance Analysis. Cost Accounting Principles & Practice. Ludhiana. Kalyana Publishers. Pgs. V – 244 – V- 333.