Brandt Gardner, the owner-manager of a small firm that manufactures feed processing equipment and round-hay bailers, is unhappy with the latest report on financial performance in the Kansas City, Missouri, plant. The company had recently installed a standard cost system in the Kansas City plant with the objective of controlling manufacturing costs. The performance report for the year ended revealed that the variances for materials, labor, and variable overhead were all within the desired ranges, but the fixed overhead spending and volume variances were both significantly unfavorable. Brandt wanted an explanation of the fixed overhead variances and a recommendation.
Which do you think is more important for control of fixed overhead costs: the spending variance or the volume variance? Explain.
The spending variance and the volume variance are both important for control of fixed overhead costs, but the spending variance is typically considered to be more important. This is because the spending variance reflects how well the company is controlling its fixed overhead costs, while the volume variance reflects how well the company is using its fixed overhead capacity.
The spending variance can be caused by a number of factors, such as:
- Increased prices for fixed overhead items:Â This could be due to inflation or to an increase in the cost of supplies.
- Inefficient use of fixed overhead resources:Â This could be due to poor planning or to inefficient operations.
- Changes in the mix of products produced:Â If the company produces a different mix of products, this could lead to an increase in the spending variance.
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