How Spending and Idle Capacity Variance Is Important?
SPENDING AND IDLE CAPACITY VARIANCE ANALYSIS: The $7,000 under-applied factory overhead had been analyzed into a $750 unfavorable spending variance and a $6,250 unfavorable idle capacity variance. The $1.50 overhead rate used there and based on 200,000 direct labor hours is not applicable for the departmentalized illustration. New rates with different bases have been created.
However, it should be possible to analyze each departmental over or under-applied figure and determine a departmental spending and idle capacity variance.
What is particularly needed is the amount of overhead budgeted for the level of operation attained (capacity utilized) which, in turn, requires a knowledge of the fixed and variable overhead in each of the producing departments.
To develop the budget allowance, the estimates shown in the summaries of the departmental factory overhead and the distribution of service department costs are examined.
The summary of the departmental factory overhead indicates the fixed and variable departmental costs at the bottom line of the estimates. The service department costs distributed to the producing department as shown in the distribution of service departments costs summary are considered variable costs for the producing departments.
The fixed variable classification does not apply after the distribution.
The spending and idle capacity variance analysis reproduced is prepared for executive management on the basis of the actual annual data after the books have been closed. However, the middle and operating management levels require cost control information currently at least once a month.
With ever greater emphasis placed upon the control of costs by the responsible supervisory personnel, a procedure must be found which communicates to all levels of management the control information in a manner that permits the charging and discharging of responsibility of cost incurrence. The spending and idle capacity variance analysis helps the executive management in taking strategic decisions.