Or you maybe a small business owner want to set the standard. Of course, prior to setting a marketing standard in a given trade territory, you would need to examine prior, current, and forecasted conditions for the company itself and that given geographical area.
Let us proceed to analysis of variances relating to overheads. Now the overheads variance analysis is different from variance analysis relating to materials and labour. Here the overheads and inputs are already determined. These pre determined overheads and inputs are called the standard.
The overhead is considered in terms of predetermined rate and is applied to the input.
There can be different bases for the absorption of overheads e. Overhead variances may be classified into fixed and variable overhead variances and fixed overhead variance can be further analysed according to the courses.
In case of variable overheads, it is assured that variable overheads vary directly with production so that any change in expenditure can affect costs. Some authors say that a variance may arise through inefficiency, but as these costs are usually very small per unit of output, it is to be ignored and any variance in variable overhead is attributed to expenditure variance.
Considering the fixed overheads cost, the difficulty arises in determining standard overhead rates. This is so because this is dependent on the volume or level of activity.
Any change in volume or level of activity causes a change in the overhead rate. Therefore the fixing the volume or level of activity is a crucial aspect in determining standard overhead rate.
Now if the management decides to change the normal volume or level of activity, without a corresponding change in the fixed amount of overheads, then a change occurs in the overhead rate.
Here it may be noted that in the case of material or labour variances, the volume decision does not in any way influence the fixation of standard rate. So to resolve this problem, normally the Budget is used in place of the standard.
Another important thing to be noted in case of overhead analysis is that different writers use different modes of computation of overhead variance and also different terminologies. After having discussed the preliminary aspect of overhead variance, now we go about the analysis of the overhead cost variances.
Classification of Overhead Variance The term overhead includes indirect material, indirect labour and indirect expenses. It may relate to factory, office and selling and distribution centres. Overhead variance can be classified as sown in the following diagram: Overhead cost variance is the difference between standard cost of overhead absorbed in the output achieved and the actual overhead cost.
Simply, it is the difference between total standard overheads absorbed and total actual overheads incurred. Therefore, the formula for overhead cost variance is as follows: Fixed cost variance may be further divided as fixed expenditure variance and fixed volume variance.
Fixed volume variance may again be sub-divided into efficiency variance, capacity variance and calendar variance.Overhead variances may be classified into fixed and variable overhead variances and fixed overhead variance can be further analysed according to the courses.
In case of variable overheads, it is assured that variable overheads vary directly with production so that any change in expenditure can affect costs. Marketing: Marketing and Variable Costs Essay Economy of Scale -bigger you are, lower the production cost -buy in bulk, less equipment cost -the more products a company makes, the lower the production costs for each individual product 1.
A cost variance is the difference between actual cost and standard cost. True False 8.
A budget performance report that includes variances can have variances caused by both price differences and quantity differences. True False 9. A cost variance equals the sum of the quantity variance and the price variance.
True False All fixed and variable production cost is included in stock rating in soaking up bing while, fringy bing merely include variable production cost in stock valuation5. It allocates part of fixed fabricating operating expense to each unit of merchandise and hence, it will be brought frontward to .
Graph total fixed cost, total variable cost, and total cost. Explain how the law of diminishing returns influences the shapes of the variable - cost and total- cost curves Graph AFC, AVC, ATC, and MC. Next, the actual costs will be keeping tracked and compared with the budget.
Lately, the decision will be made based on the variances. One thing to remember that variances can have multiple causes. The decision made in one part can fix the cause of another part.