How Spending and Idle Capacity Variance Is Important?

Knowledgiate Team Accounting 555 Views

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.

DEA Efficiency
Analysis
Efficiency analysis in hours
not days using Data
Envelopment

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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.

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