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Advantages
Performance Measurement
Responsibility Accounting
Management By Exemption
Where: AH = actual machine hours AVR = actual variable-overhead rate SVR = standard variable-overhead rate
Where: AH = actual machine hours SH = standard machine hours SVR = standard variable-overhead rate
Fixed-Overhead Variances
Fixed-Overhead Budget Variance =
Actual fixed overhead - Budgeted fixed overhead The budget variance is the real control variance for fixed overhead, because it compares actual expenditures with budgeted fixed-overhead costs.
Where: MPV = Material price variance AP = Actual unit price of materials SP = Standard unit price of materials AQ = Actual quantity of materials purchased Decision Rule: AP > SP AP < SP Unfavorable Favorable
where: LRV = Labor rate variance AR = Actual labor rate SR = Standard labor rate AH = Actual labor hours worked Decision Rule: AR > SR AR < SR Unfavorable Favorable
where: LEV = Labor efficiency variance AH = Actual labor hours worked SH = Standard hours allowed for the output produced SR = Standard labor rate Decision Rule: AH > SH AH < SH Unfavorable Favorable
Example: Suppose that 2,000 units have been produced during the period and 5,400 direct labor hours have been worked at a rate of $13.75 per direct labor hour. Standard rate per direct labor hour is $14.00.
= 74,250 75,600
Labor rate variance = $(1,350) Favorable
Disposition of Variances
Variances are temporary accounts and most companies close them directly into Cost of Goods Sold at the end of each accounting period.
Disadvantages
The monitoring cycle can be so long that it renders the application of control impossible.
Typically, by the time a problem has been identified through variance analysis it is too late to take corrective action.