Let's look in our notes at overhead variances.
It says, about page four or so, overhead variances.
When companies apply a standard cost system to overhead, the amount of overhead applied
will be determined on the basis of the standard amount of allocation base that should have
been used in the production process based on the number of units.
If overhead is applied, for example, on direct labor hours, then overhead is applied, O-A,
overhead applied.
Application can be as calculated.
OA equals standard direct labor hours times predetermined overhead rate.
If the formula in the formula above, predetermined overhead rate, POHR, including both variable
and fixed.
It is calculated in three steps, three-step process.
The total of the base is estimated.
For example, if the company expects to produce 50,000 units, so we expect to produce 50,000
units, at 2 standard direct labor hours a unit, the estimate for the base is 100,000
hours.
So that's what this was, 50,000 at 2, 100,000 direct labor hours.
Two, second, the total overhead is estimated on the basis of expected fixed overhead for
the period and variable overhead per unit of the base.
If, for example, the entity paid rent of $400,000 per year and utilities of a dollar, at 100,000
hours, total overhead would be $400,000 rent, plus $100,000 utilities, calculated at 100,000
for a dollar, for a total of $500,000, which is what we did.
And that was in our base.
Remember here we said fixed is 400, variable was a dollar at 100,000, that equals 500,000.
That was our base, that's what we set up here.
400 plus 100,000, which is a dollar at 100,000 hours.
Then it says, three, finally total estimated overhead is divided by the number of units
in the base to establish a rate.
500,000 at a dollar would be $5 dollars an hour, which is $4 dollars for fixed and a
dollar for variable.
That's what we had over here.
We had $4 dollars for fixed, $400,000 at 100,000 hours is 4, and $100,000 dollars at 100,000
is a dollar.
So we have 4 and 1.
Those are what we brought over, so if you look at this, this is really 4 at 100, this
is 4 at 100.
This over here was $1 dollar at 97, because it's close to actual.
This is here 100,000, 'cause that's within the flexible budget.
This is applied, this is close to applied 96, which is standard allowed for actual,
standard allowed for actual.
Next paragraph, many companies will further analyze overhead using a 2-, a 3- or a 4-variance
approach.
The most common is 3, dividing it into spending, efficiency and volume.
The overhead spending variance is, and you can look at that.
The overhead efficiency variance is, and the overhead production volume variance is.
And that's the calculation for it.
So as you look through it, that's where the differences are coming from.
That's what's important to understand as far as how they're calculated.
Alright now, let's look at that chart again where it says actual, flexible budget, flexible
budget standard and applied.
That's what got applied into work in process.
So actual overhead is actual quantity times actual.
Actual, actual is actual.
Flexible budgeted actual is your actual quantity at standard allowed, overhead rate.
Your flexible budget is standard quantity and standard overhead rate.
And your applied is what got applied, applied based on your application rate.
So back up here, we've got actual, start here 'cause it's given.
You've got flexible budget, that's whatever your budget was, $400,000.
You've got fixed plus variable.
Notice this is the budgeted dollar, but this is close to actual, this is close to standard.
This is your applied.
You would have applied the $4 dollars at 96.
Here you would have applied a dollar at 96.
So notice here, this is the difference, all fixed.
Here, this is the difference, all variable.
Here, both are different.
There's the spending, both.
Efficiency, variable.
Volume, fixed.
So again, I realize it's a tough topic.
I realize it's a bit difficult.
That's why what I wanna do in a minute is go through some questions.