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    Factory Overhead Idle Capacity Variance

    Uploaded by

    Khalid Aziz
    1) The factory overhead idle capacity variance is the difference between the budget allowance for overhead based on actual hours worked and the actual overhead incurred. 2) It is calculated as the budgeted allowance for overhead based on actual hours worked minus the actual hours worked multiplied by the standard overhead rate. 3) In the example, the idle capacity variance is unfavorable Rs. 420, which means actual overhead was Rs. 420 more than the overhead allowance based on actual hours worked.

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    Factory Overhead Idle Capacity Variance

    Uploaded by

    Khalid Aziz
    1K views4 pages
    1) The factory overhead idle capacity variance is the difference between the budget allowance for overhead based on actual hours worked and the actual overhead incurred. 2) It is calculated as the budgeted allowance for overhead based on actual hours worked minus the actual hours worked multiplied by the standard overhead rate. 3) In the example, the idle capacity variance is unfavorable Rs. 420, which means actual overhead was Rs. 420 more than the overhead allowance based on actual hours worked.

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    Factory Overhead Idle Capacity Variance,

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    Factory Overhead Idle Capacity Variance,

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    1) The factory overhead idle capacity variance is the difference between the budget allowance for overhead based on actual hours worked and the actual overhead incurred. 2) It is calculated as the budgeted allowance for overhead based on actual hours worked minus the actual hours worked multiplied by the standard overhead rate. 3) In the example, the idle capacity variance is unfavorable Rs. 420, which means actual overhead was Rs. 420 more than the overhead allowance based on actual hours worked.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    1K views4 pages

    Factory Overhead Idle Capacity Variance

    Uploaded by

    Khalid Aziz
    1) The factory overhead idle capacity variance is the difference between the budget allowance for overhead based on actual hours worked and the actual overhead incurred. 2) It is calculated as the budgeted allowance for overhead based on actual hours worked minus the actual hours worked multiplied by the standard overhead rate. 3) In the example, the idle capacity variance is unfavorable Rs. 420, which means actual overhead was Rs. 420 more than the overhead allowance based on actual hours worked.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 4

    IQRA COMMERCE NETWORK: COST AND MANAGEMENT ACCOUNTING

    OR
    K

    Factory Overhead Idle Capacity Variance:


    Definition and Explanation:

    Factory overhead idle capacity variance is the difference between the budget allowance
    based on actual hours worked and actual hours worked multiplied by standard rate.

    NE
    TW

    The idle capacity variance indicates the amount of overhead that is either under - or over
    absorbed because actual hours are either less or more than the hours on which the
    overhead rate was based. This variance is the responsibility of executive management.

    Formula of Idle Capacity Variance:

    Following formula/equation is used for the calculation of factory overhead idle capacity
    variance:

    CE

    [Budgeted allowance based on actual hours worked* (Actual hours worked


    Standard overhead rate)]
    *Fixed expenses budgeted + Variable expenses (actual hours worked

    ER

    Example:

    variable overhead rate)

    Following is the flexible budget of a department of a manufacturing company.

    100%

    800

    1,000

    1,200

    3,200

    4,000

    4,800

    RS.1,600

    RS.2,000

    RS.2,400

    RS.0.50 / dlh

    Indirect materials

    960

    1,200

    1,440

    RS.0.30

    Supplies

    640

    800

    960

    RS.0.20

    Repairs

    480

    600

    720

    RS.0.15

    Power and light

    160

    200

    240

    RS.0.05

    -----------

    -----------

    -----------

    -----------

    Capacity

    CO
    M
    M

    Department 3
    Monthly Flexible Budget
    80%
    90%

    Standard production
    Direct labor hours

    Variable factory overhead:

    IQ

    RA

    Indirect labor

    SIR KHALID AZIZ: 0300-2540827/0322-3385752

    IQRA COMMERCE NETWORK: COST AND MANAGEMENT ACCOUNTING


    RS.3,840

    RS.4,800

    RS.5,760

    ======

    ======

    ======

    RS.1,200

    RS.1,200

    RS.1,200

    Depreciation on machinery

    700

    700

    700

    Insurance

    250

    Property tax

    250

    Power and light

    400

    Maintenance

    400

    Supervisor

    -----------

    250

    250

    250

    400

    400

    400

    400

    -----------

    -----------

    RS.3,200

    RS.3,200

    RS.3,200 per
    month

    -----------

    -----------

    -----------

    ======

    RS.7,040

    RS.8,000

    RS.8,960

    RS.3,200 per
    month
    + RS.1.20 per dlh

    ======

    ======

    ======

    ======

    CE

    CO
    M
    M

    Total factory overhead

    250

    RS.3,200

    ER

    Total fixed factory overhead

    ======

    NE
    TW

    Fixed factory overhead:

    RS.1.20 per dlh

    OR
    K

    Total variable factory overhead

    Following data is also provided:

    Actual factory overhead is RS.7,384. Actual production is 850 units of finished product.
    Actual hours used are 3,475 hours. 4 standard hours are allowed to complete a unit of
    finished product.
    Required: Calculate factory overhead idle capacity variance.

    RA

    Calculation of Standard Overhead Rate:

    IQ

    Assuming that 90% column represents normal capacity, the standard overhead
    rate is computed as follows:
    Total variable factory overhead / Direct labor hours
    = RS.8,000 / 4,000

    SIR KHALID AZIZ: 0300-2540827/0322-3385752

    IQRA COMMERCE NETWORK: COST AND MANAGEMENT ACCOUNTING

    At 90% capacity level, the rate consists of:


    Total variable factory overhead / Direct labor hours
    = RS.4,800 / 4,000

    NE
    TW

    = RS.1.20 variable factory overhead rate

    OR
    K

    = RS.2 per standard direct labor hour

    Total fixed overhead / Direct labor hours


    = RS.3,200 / 4,000

    = RS.0.80 fixed factory overhead rate

    Total factory overhead rate at normal capacity:


    (RS.1.20 + RS.0.80) = RS.2.00

    CE

    Calculation of factory overhead idle capacity variance:


    Budgeted allowance based on actual hours worked:
    Fixed expenses budgeted

    ER

    Variable expenses (3,475 actual hours worked RS.1.20 variable overhead rate)

    RS.3,200
    RS.4,170
    -----------

    CO
    M
    M

    Actual hours worked Standard overhead rate (3,475 actual hours 2 standard hours)

    Unfavorable overhead Idle capacity variance

    Idle capacity variance consists of fixed expenses only and can also be computed as follows:
    Download

    Assignments

    View Online

    Video

    Solved
    Free Downloads

    Free Downloading

    IQ

    RA

    Expenses

    Exam Results

    SIR KHALID AZIZ: 0300-2540827/0322-3385752

    RS.7,370
    RS.6,950
    ----------RS.420
    unfav.

    IQRA COMMERCE NETWORK: COST AND MANAGEMENT ACCOUNTING


    4,000 hours

    OR
    K

    Normal capacity
    actual hours worked

    3,475 hours
    ------------

    Difference

    525 hours
    ------------

    Unfavorable Idle capacity variance (525 hours 0.80 fixed rate)

    IQ

    RA

    CO
    M
    M

    ER

    CE

    NE
    TW

    RS.420 unfav.

    SIR KHALID AZIZ: 0300-2540827/0322-3385752

    ======

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