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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:
Budget for December 2003;
Shs.
Fixed Overheads
11,480
Variable Overheads
13,120
Labour Hours
3,280 hours
Standard Hours of Production
Actual Results for December 2003
12,100
13,930
Actual Labour Hours
3,150/hours
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.
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