“Now let’s talk about the UGLY variances, which are the overhead variances!”
In the video, 5.03 - Overhead Variances – Lesson 1, Roger Philipp, CPA, CGMA, reviews the components of manufacturing inventory which includes, direct materials, direct labor and factory overhead. All of these components can be analyzed for spending, efficiency and volume variances.
Roger also emphasizes the flexible budget equation, which is the basis for all overhead variance analysis. Going into an example from the course BEC textbook, he describes a situation with an allocation base of 100,000 direct labor hours at budgeted production level, budgeted fixed rent of $400,000 and budgeted variable cost of $1 in electricity for each direct labor hour. Of course Roger plugs these budgeted numbers into the flexible budget equation, then goes into the actuals: fixed rent was not-so-fixed at $390,000 and electricity ended up costing $1.01 an hour. Most importantly, actual direct labor hours is 97,000 but standard direct labor hours at budget for the actual level of production is 96,000.
Understanding the last point is important, so Roger writes it up on the whiteboard, and warns us we’ll be using all of these direct labor hour numbers in the upcoming variance analysis!
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Video Transcript Sneak Peek:
OK, now let's talk about the ugly variances, which are the overhead variances. And this is something that even though you just studied it in school, you probably just prayed that the exam wouldn't be tough, and you hopefully got through the exam.
What we're looking at here with overhead... Now remember with overhead we said we've got direct materials, direct labor and factory overhead. With overhead we have spending, efficiency, volume. Something that's important to understand is all of your overhead variance analysis is done using the flexible budget equation. What was the flexible budget equation? Total cost equals fixed plus variable times X. So as we go through and we look at these, we're gonna be looking at fixed plus variable times X, where X is gonna be changing as we go across.