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Questions and Answers
Fixed overhead costs do not change with increases in production levels.
True
Variable overhead costs fluctuate according to levels of production.
True
Factory overhead variance is separated into a quality variance and a volume variance.
False
The controllable variance measures the efficiency and effectiveness of the management in controlling overhead costs.
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Variable overhead costs are easier to pin down and keep within a budget compared to fixed overhead costs.
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Factory overhead cost includes both fixed and variable cost elements.
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Study Notes
Factory Overhead Cost
- Factory overhead cost includes fixed and variable cost elements
Fixed Cost Elements
- Fixed overhead does not change with increases in levels of production
- Examples of fixed overhead include:
- Mortgage or rent for buildings such as a headquarters office
- Salaries for administrative staff, managers, and supervisors
- Taxes and insurance
Variable Cost Elements
- Variable overhead fluctuates according to levels of production
- Examples of variable overhead include:
- Production supplies
- Energy costs to run production lines
- Wages for those handling and shipping the product
- Variable overhead moves in tandem with changes in production output
Factory Overhead Variance
- Factory overhead variance is separated into controllable variance and volume variance
Controllable Variance
- Reflects the difference between actual overhead costs incurred and budgeted overhead costs
- Measures the efficiency and effectiveness of management in controlling overhead costs
- Includes only costs that management can control or influence directly
Volume Variance
- Arises due to the difference between budgeted level of activity and actual level of activity achieved
- Measured in terms of standard hours or machine hours
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Description
Test your knowledge on the components of factory overhead costs, including fixed and variable cost elements. Learn about examples of fixed overhead costs like rent and salaries, as well as the fluctuating nature of variable overhead costs.
