Overhead Total Variance

Overhead Total Variance Standard Costing Fixed Overhead Variable Overhead Overabsorbed Overhead Underabsorbed Overhead
In a system of standard costing, the overhead total variance is the difference between the standard overhead recovered for actual units produced and the actual overhead incurred for a period.
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Definition

Overhead Total Variance

In a system of standard costing, the overhead total variance measures the difference between the standard overhead recovered for the actual units produced and the actual overhead incurred over a given period. This variance can be further divided into fixed overhead variances and variable overhead variances.

  • Over-Recovery/Overabsorbed Overhead: Occurs when the overhead recovered exceeds the overhead incurred.
  • Under-Recovery/Underabsorbed Overhead: Occurs when the overhead incurred exceeds the overhead recovered.

Examples

  1. Overabsorbed Overhead Example:

    • Standard Overhead Rate: $10 per unit
    • Actual Units Produced: 1,000 units
    • Standard Overhead Recovered: $10 * 1,000 = $10,000
    • Actual Overhead Incurred: $9,000
    • Overhead Total Variance: $10,000 - $9,000 = $1,000 (Overabsorbed)

  2. Underabsorbed Overhead Example:

    • Standard Overhead Rate: $8 per unit
    • Actual Units Produced: 500 units
    • Standard Overhead Recovered: $8 * 500 = $4,000
    • Actual Overhead Incurred: $5,000
    • Overhead Total Variance: $4,000 - $5,000 = -$1,000 (Underabsorbed)

Frequently Asked Questions (FAQs)

What is the significance of the overhead total variance?

  • The overhead total variance provides insight into the efficiency and effectiveness of overhead cost management in production.

How do you calculate overhead total variance?

  • Calculate the difference between the standard overhead recovered for actual production and the actual overhead incurred.

What are the types of overhead variances?

  • Overhead variances are typically divided into fixed overhead variances and variable overhead variances.

What causes an overabsorbed overhead?

  • Overabsorbed overhead occurs when the actual overhead costs are lower than the standard overhead recovered.

What causes an underabsorbed overhead?

  • Underabsorbed overhead happens when the actual overhead costs exceed the standard overhead recovered.

Can overhead total variance be zero?

  • Yes, if the actual overhead incurred equals the standard overhead recovered, the total variance would be zero.

How is overhead variance useful for managers?

  • Managers use overhead variance to analyze cost control and identify areas needing improvement in cost management.

How does standard costing relate to overhead total variance?

  • Standard costing involves setting standard costs for production, including overhead, which are then compared to actual costs to determine variances.

Fixed Overhead Total Variance

  • A component of the overhead total variance that focuses on the fixed overhead costs.

Variable Overhead Total Variance

  • A component of the overhead total variance that focuses on the variable overhead costs.

Overabsorbed Overhead

  • Occurs when the standard overhead recovered exceeds the actual overhead incurred.

Underabsorbed Overhead

  • Happens when the actual overhead incurred exceeds the standard overhead recovered.

References

Suggested Books

  • “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren
  • “Management Accounting” by Anthony A. Atkinson
  • “Introduction to Management Accounting” by Charles T. Horngren

Accounting Basics: “Overhead Total Variance” Fundamentals Quiz

### What is overhead total variance? - [x] The difference between the standard overhead recovered and the actual overhead incurred. - [ ] The total cost of raw materials. - [ ] The profit margin of a product. - [ ] The total variable costs in production. > **Explanation:** Overhead total variance represents the difference between the standard overhead recovered for actual units produced and the actual overhead incurred. ### What does an overabsorbed overhead indicate? - [x] Overhead recovered exceeds actual overhead incurred. - [ ] Overhead incurred exceeds overhead recovered. - [ ] Total production cost is negative. - [ ] Standard costs are higher than variable costs. > **Explanation:** Overabsorbed overhead occurs when the overhead recovered exceeds the overhead incurred. ### What does an underabsorbed overhead indicate? - [ ] Overhead recovered exceeds actual overhead incurred. - [x] Overhead incurred exceeds overhead recovered. - [ ] Standard costs are equal to actual costs. - [ ] Only variable costs were incurred. > **Explanation:** Underabsorbed overhead happens when the incurred overhead exceeds the recovered overhead. ### Which costing system uses overhead total variance? - [x] Standard costing - [ ] Absorption costing - [ ] Variable costing - [ ] Activity-based costing > **Explanation:** Overhead total variance is a concept within the standard costing system. ### What components constitute the overhead total variance? - [ ] Direct materials and direct labor variance - [x] Fixed overhead and variable overhead variances - [ ] Selling and administrative expenses - [ ] Research and development costs > **Explanation:** Overhead total variance consists of fixed overhead and variable overhead variances. ### How do you determine the standard overhead recovered? - [x] Standard overhead rate multiplied by actual units produced - [ ] Actual overhead rate multiplied by budgeted units - [ ] Direct material cost multiplied by units produced - [ ] Sum of all indirect costs > **Explanation:** The standard overhead recovered is determined by multiplying the standard overhead rate by the actual units produced. ### Why is overhead variance analysis important? - [x] Helps in cost control and identifying areas to improve - [ ] Determines the selling price of products - [ ] Measures customer satisfaction - [ ] Ensures compliance with financial reporting standards > **Explanation:** Overhead variance analysis helps managers in controlling costs and identifying areas needing improvement. ### Which of the following could be a reason for an overabsorbed overhead? - [x] Actual overhead costs were lower than expected - [ ] Standard overhead rate was set too low - [ ] Production levels were lower than standard - [ ] Actual overhead costs were higher than expected > **Explanation:** Overabsorbed overhead could result from actual overhead costs being lower than the standard overhead recovered amount. ### What is the primary purpose of standard costing in relation to overhead variance? - [x] To provide a benchmark for measuring performance - [ ] To calculate the cost of raw materials - [ ] To set selling prices - [ ] To automate financial reporting > **Explanation:** The primary purpose of standard costing in relation to overhead variance is to provide a benchmark for measuring performance. ### When actual overhead incurred equals standard overhead recovered, what is the total variance? - [ ] Overabsorbed - [ ] Underabsorbed - [x] Zero - [ ] Negative > **Explanation:** When actual overhead incurred equals the standard overhead recovered, the overhead total variance is zero.

Thank you for exploring the concept of overhead total variance with us. Ensure your continued learning through our detailed definitions, practical examples, and quiz questions to master this essential accounting concept!

Tuesday, August 6, 2024
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