We can work on Fixed Overhead Costs

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.

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Sample Answer

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: This could be due to inflation or to an increase in the cost of supplies.
  • Inefficient use of fixed overhead resources: This could be due to poor planning or to inefficient operations.
  • Changes in the mix of products produced: If the company produces a different mix of products, this could lead to an increase in the spending variance.

Full Answer Section

The volume variance can be caused by a number of factors, such as:

  • Changes in the level of production: If the company produces more or less than planned, this will lead to a change in the volume variance.
  • Changes in the efficiency of production: If the company becomes more or less efficient in its production, this will also lead to a change in the volume variance.

In general, the spending variance is more controllable than the volume variance. This is because the spending variance is caused by factors that are within the company’s control, such as the prices of fixed overhead items and the efficiency of fixed overhead resources. The volume variance, on the other hand, is caused by factors that are outside of the company’s control, such as changes in the level of production.

Therefore, the spending variance is typically considered to be more important for control of fixed overhead costs. However, both variances are important, and they should both be monitored closely.

Here are some recommendations for Brandt Gardner to improve the control of fixed overhead costs:

  • Set realistic standards for fixed overhead costs: The standards should be based on historical data and on the company’s current operating conditions.
  • Monitor fixed overhead costs closely: The spending variance should be monitored on a regular basis to identify any problems early on.
  • Take corrective action promptly: If the spending variance is unfavorable, corrective action should be taken promptly to bring the costs back in line with the standards.
  • Analyze the volume variance: The volume variance should be analyzed to determine if it is due to changes in the level of production or to changes in the efficiency of production.
  • Take corrective action as needed: If the volume variance is due to changes in the efficiency of production, corrective action should be taken to improve efficiency.

By following these recommendations, Brandt Gardner can improve the control of fixed overhead costs and help to ensure that the Kansas City plant remains profitable.

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