Variances using ABC

As part of variance analysis managers will need to establish standard costs. Activity based costing is one method for determining costs and hence will have implications of some of the variances calculated.

ABC variances

• Compared to traditional absorption costing, the use of ABC is most likely to impact overhead variances.
• For example, standard costs can be compared to actual and an overhead expenditure and efficiency variance calculated.

 Illustration - ABC variances

The following information relates to H Company's ordering activity for the period:

Required

Calculate the overhead expenditure variance and the overhead efficiency variance for the ordering activity and comment briefly on the meaning of each variance.

Solution

Variable overhead expenditure variance

Variable overhead efficiency variance

Variance = 600 F orders × standard cost of $45 per order = $27,000 F

Each unit used less than 0.2 orders, resulting in a favourable variance.

Rating :	Ratings & Comments  (Click the stars to rate the page)

Tags:	variances;ABC;ABC variances