Question

brandt gardner the owner manager of

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. 1. Which do you think is more important for control of fixed overhead costs: the spending variance or the volume variance? Explain. (inuvour discussion rubric.

Answer 1

The volume variance occurs when the full capacity for production is not utilized by the business whereas spending variance is the difference between budgeted fixed payments and actual fixed expenses incurred. Spending variances are unlikely to vary by a large figure since fixed expenses such as salaries, rent, depreciation ,taxes usually remain same as per the budget. On the other hand, volume variance represents that part of the under utilized capacity for which the company will have to incur the fixed expenses since these costs do not differ with production. Volume variance is slightly more critical since the company is paying for those expenses from which it does not derive any benefit from. It violates the cost revenue principle of accounting i.e. matching of expenses with the revenues. Also, the company pays for inefficiency of the plant leaving further scope for investigation.