Explain how a difference in the overhead costs between the two systems may have

Question

Explain how a difference in the overhead costs between the two systems may have occurred.

Ayala Company manufactures four products in a single production facility. The company uses activity-based costing. The following activities have been identified through the company's activity analysis: (a) inventory control, (b) machine setups, (c) employee training (d) quality inspections, (e) material ordering, (f) drilling operations, and (g) building maintenance. For each name a cost driver that might be used to assign overhead costs to products.

Explanation / Answer

The overall variable overhead flexible-budget variance is computed as the difference between actual variable overhead costs and the flexible-budget variable overhead costs. This overall variance is then subdivided into the variable overhead efficiency variance and the variable overhead spending variance. Calculation of each of these two components of the overall overhead flexible-budget variance is as follows: Variable overhead efficiency variance = (Actual Qty of Allocation Base – Standard Qty of Allocation Base) multiplied by Standard Price Variable overhead spending variance = (Actual Price of Allocation Base – Standard Price of Allocation Base) multiplied by Actual Qty The fixed overhead flexible-budget variance (also known as the fixed overhead spending variance) is strictly the difference between actual fixed overhead costs and the amount originally budgeted for fixed overhead, because the flexible budget amount is the same as the static budget amount for these fixed costs. After determining the difference between actual and budgeted fixed overhead costs, analysis then turns to computing the production-volume variance. The production-volume variance calculates the variance amount due to differences between budgeted fixed overhead and allocated fixed overhead. The production volume variance will occur anytime actual output is different than budgeted output, or when actual capacity was less than the capacity used to calculate the fixed-overhead allocation rate, since the original fixed-overhead budget amount was converted to a per-unit allocation rate for inventory costing purposes. The production-volume variance thus measures the cost of differences between denominator-level capacity utilization and actual capacity utilization. Managers need to take care when interpreting the production-volume variance because the production-volume variance only identifies differences between actual and budgeted or denominator-level production, not why those differences occurred. Managers may have used a higher capacity level in the original budgeted amounts and/or the changes in production may be due to pricing decisions made elsewhere or other market factors.

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