FREE IGNOU MCO-05 SOLVED ASSIGNMENT 2023
Q5
a) Variance Analysis Relating to Overheads:
Variance analysis for overheads involves analyzing the differences between the actual overhead costs and the budgeted or standard overhead costs. Overheads include various indirect costs incurred to support production and operations, such as rent, utilities, maintenance, and administrative expenses.
The differences in variance analysis relating to overheads are as follows:
- Fixed Overheads vs. Variable Overheads: Fixed overheads remain constant regardless of the level of activity or production, while variable overheads change with the level of activity. In variance analysis, fixed overheads are likely to have spending variances (due to changes in actual costs) but no efficiency variances (as they are not linked to production levels). On the other hand, variable overheads can have both spending and efficiency variances.
- Controllable vs. Non-controllable Overheads: Controllable overheads are costs that can be directly influenced or controlled by a specific department or manager. Non-controllable overheads are costs that cannot be influenced at the departmental level and are usually determined by higher management or external factors. Variance analysis for controllable overheads focuses on evaluating the performance of specific departments or managers, whereas non-controllable overheads are analyzed to understand external factors’ impact on costs.
- Spending Variance vs. Efficiency Variance: The spending variance in overheads measures the difference between the actual overhead cost and the budgeted or standard overhead cost, considering the actual level of activity. The efficiency variance, on the other hand, measures the impact of using more or fewer resources than anticipated for the actual level of activity. Efficiency variance can be significant for variable overheads, where the level of activity affects resource consumption.
