{"id":114,"date":"2021-01-26T22:08:39","date_gmt":"2021-01-26T22:08:39","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&p=114"},"modified":"2021-08-15T19:43:13","modified_gmt":"2021-08-15T19:43:13","slug":"introduction-to-indirect-cost-variances","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/chapter\/introduction-to-indirect-cost-variances\/","title":{"raw":"Introduction to Indirect Cost Variances","rendered":"Introduction to Indirect Cost Variances"},"content":{"raw":"

What you will learn to do: identify indirect costs standards and variances<\/h2>\r\nAccountants usually use a formula to allocate overhead to production. For instance, if the Boulevard Blanks management team wants real-time information during the month, rather than waiting for the financial accountants to produce the month end reports, they might use an estimate. Based on historical information, they could come up with a \u201cburden\u201d rate. If they know that variable overhead, such as sandpaper and other finishing supplies, runs about $1.20 per body, they could allocate that amount during the production run. Usually, they do it based on some metric they are collecting, such as direct labor hours. They know the standard for one completed body is 1.5 hours. If they allocate $0.80 per direct labor hour worked, they can automate the allocation process without having to stop production to count units, since hours worked are already being collected.\r\n\r\nFixed overhead can be allocated the same way. If the budget is $12,375 for the month, and expected production is 1,500, that\u2019s $8.25 per body completed, which could be allocated by charging $5.50 per direct labor hour, since a completed body should take 1.5 hours (1.5 x 5.5 = $8.25).\r\n\r\n\"ManyVariable overhead will be materials like paint, supplies, and even in some cases utilities (such as electricity for a refinery) that are too hard to trace directly to the cost object but vary directly with production (often these will include some mixed costs items).\r\n\r\nFixed overhead remains the same at every level of production within a relevant range. This would include factory rent, property taxes, most utilities, supervisor salaries, depreciation on equipment, janitorial, insurance, etc.\r\n\r\nJust as we calculate variances for direct costs like labor and materials, we calculate variances for indirect costs, both variable and fixed.\r\n\r\nWhen you are done with this section, you will be able to:\r\n