Question

Case 2:

Izki manufacture LLC has the following cost information for industrial product. The production schedule for the month of March 2020 required completion of 5,500 pieces. However, 5,000 pieces were completed. Purchases for the month March 2020 amounted to 50,000 Kg of material at the total invoice price of RO 200,000 (actual). Production records for the month of March 2020 showed actual materials used is 40,000 Kg and actual direct labor used is 20,000 hours RO 60,000. Standard cost of Material per completed piece is 20 Kg @ RO 10 and standard labor cost is 10 hours @ RO 4.

The manager of the company requested you to:

A. Suggest the manger on adverse fixed overhead variance and how to control it to minimize the cost of

production. ((300 words))

Answer 1

Hi Friend,

Please refer to the solution provided below.

Adverse fixed overhead expenditure variance indicates that higher fixed costs were incurred during the period than planned in the budget.

An adverse variance may be caused by the following:

• Expansion of business undertaken during the period, which was not taken into consideration in the budget setting process, causing a stepped increase in fixed overheads.

• Inefficient fixed overheads management (e.g. due to empire-building pursuits of senior management).
• Planning errors (e.g. increase in insurance premium being higher than budget due to changes in the risk profile of business).

How to control this adverse Fixed overhead variance:

An unfavorable fixed overhead budget variance results when the actual amount spent on fixed manufacturing overhead costs exceeds the budgeted amount. The fixed overhead budget variance is also known as the fixed overhead spending variance.

Fixed overhead costs are the indirect manufacturing costs that are not expected to change when the volume of activity changes. Some examples of fixed manufacturing overhead include depreciation, property tax and insurance of the factory buildings and equipment, and the salaries of the manufacturing supervisors and managers.

Since the fixed manufacturing overhead costs should remain the same within reasonable ranges of activity, the amount of the fixed overhead budget variance should be relatively small.

Some ways to improve the Fixed Overhead annual basis

• Relocate to an area with cheaper rent or negotiate lower lease payments with your landlord
• Sub-lease a portion of your space to another tenant who will pay rent
• Reduce the number of salaried employees on staff
• Shop around for lower insurance premiums

Other than this, Better forecasting of cost and considering the industrial policies will help to make good budget at the beginning and reduce the adverse variance at the end. Surely it will not impact the cost of production.