Question

Overhead volume variances do not signal that overhead costs are in or out of control. Do you agree?

Please no hand-written answers.

Answer 1

Let us understand the meaning of Overhead Volume Variance.

To understand the meaning of the Overhead Volume Variance, let us first understand the meaning of Fixed Overhead.

Fixed Overhead: Fixed Overhead implies that the element of cost does not change due to change in the quantity.It mean that the level of output does not effect the cost. Fixed Overhead remains constant in total, but the unit cost change.

Example of Fixed Overhead: Rent Expense of $ 10,00,000. The rent expense will remain constant irrespective of the change in output. But here it is important to note that the unit price will change. Let say Company output is 10,000 Unit Then unit price would be 100 and if the level of output decrease, the unit price will increase. So we can say that the fixed overheads are fixed in total but unit price vary according to the output.

In costing a predetermined overhead rate is established to recover the overhead.This involves the establishment of predetermined Quantity. For example, if the budgeted fixed overhead is 10,000 and the budgeted quantity is 10,000 then the predetermined rate would be 1. Now if the management is able to produced  only 8000 units then there will be loss of ( 2000 * 1 ) to the management and if management is able to produce 11000 unit then there will be profit to the management. So this variance deals with under recovery and over recovery of the overhead.

The control over the overhead is shown by overhead expense variance.

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