# Tackling costing questions

The indicative syllabus content includes the following in relation to standard absorption costing: fixed overhead expenditure and the fixed overhead volume variance, together with the sub-division of the volume variance to capacity and efficiency.

Mini case study

Pickering Feeds Ltd is a SME that produces a single animal feedstuff. Its budget and actual activity for the month of January X9 showed the following:

 Budget Actual Output (tonnes) 1,000 1,200 Standard labour hours per tonne 1

Actual direct labour hours worked: 1,320

Budgeted fixed overhead recovery rate: £30,000/1,000= £30 per hour.

Let us now consider the approach to determining the fixed overhead variance and its analysis.

Firstly, determine the standard hours produced/achieved in the month: 1,200 tonnes x 1 standard hour = 1,200 standard hours.

Thus fixed overhead recovered/absorbed in production achieved: 1,200 standard hours x £30 = £36,000.

This is then compared with the actual fixed overhead incurred:

 Fixed overhead recovered/absorbed £36,000 Actual fixed overhead £32,500 Variance £3,500 (an over-recovery)

This variance initially sub-divides to: fixed overhead expenditure and fixed overhead volume.

This is expressed simply as:

This is expressed as (standard hours produced – budgeted hours) FORR (1,200-1,000) £30 = £6,000 Favourable: (the volume of output achieved was greater than budget and therefore has a favourable effect on fixed overhead recovery).

At this point we can consider the following summary:

Comprises:

We now need to examine the fixed overhead volume variance and its sub-division to efficiency and capacity as these two elements effect the level of output achieved.

This is expressed as: (standard hours produced – actual hours worked) FORR (1,200 – 1,320) £30 = £3,600 Adverse (Here there is a lack of efficiency as the actual hours worked were greater than the hours allowed for the output achieved. This represents an efficiency ratio of 91%).