Jobs or processes
are charged with with costs on the basis of standard
hours allowed multiplied by the standard factory
overhead rate. The standard hours allowed figure is
determined by multiplying the labor hours required
to produce one unit (the standard labor hour per
unit) times the actual number of units produced
during the period. The units produced are the
equivalent units of production for the department
factory overhead being analyzed. At the end of each
month, overhead actually incurred is compared with
the expenses charged into process using the standard
factory overhead rate. The difference between these
two figures is called overall factory overhead
variance or net factory overhead variance.
Example:
From the following
data calculate factory overhead overall (net)
variance:
Actual
overhead
$7,384
Actual
hours used
3,475
hours
Units
produced during the period
850
Standard hours for one unit
4
Standard factory overhead rate
$2.00
Solution:
The overall or net
factory overhead variance is computed below:
Actual overhead
$7,384
Overhead charged to production (3400*
standard hours allowed × $2 standard
overhead rate)
6,800
Overall (or net) overhead variance.
$584
unfav.
*850
equivalent units produced × 4
standard direct labor hours per unit
of production
This unfavorable overall overhead variance needs
further analysis to reveal detailed causes for
the variance and to guide management toward
remedial action. This analysis may be made by
using:
