Learning Objectives

1. Explain the similarities and differences in planning variable overhead costs and fixed overhead costs

2. Develop budgeted variable overhead cost rates and budgeted fixed overhead cost rates

3. Compute the variable overhead flexible-budget variance, the variable overhead efficiency variance, and the variable overhead spending variance

4. Compute the fixed overhead flexible-budget variance, the fixed overhead spending variance, and the fixed overhead production-volume variance

5. Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period

6. Explain the relationship between the sales-volume variance and the production-volume variance

7. Calculate variances in activity-based costing

8. Examine the use of overhead variances in nonmanufacturing settings

What do this week’s weather forecast and an organization’s performance have in common?

Much of the time, reality doesn’t match what people expect. Rain that results in a little league game being cancelled may suddenly give way to sunshine. Business owners expecting to “whistle their way to the bank” may change their tune after tallying their monthly bills and discovering that skyrocketing operational costs have significantly reduced their profits. Differences, or variances, are all around us.

Analyzing variances is a valuable activity for firms because the process highlights the areas where performance most lags expectations. By using this information to make corrective adjustments, companies can achieve significant savings. Furthermore, the process of setting up standards requires firms to have a thorough understanding of their fixed and variable overhead costs, which brings its own benefits, as the following article shows.

Managing Overhead Costs at Wework ^*

WeWork, one of the world’s richest startups, is a global shared office space provider. WeWork takes on long-term leases for raw office space and builds out the interior with flexible spaces and unique designs that it then subleases to both startups and established companies. WeWork has grown its community to more than 150,000 individuals and companies renting space starting at $190 per month.

WeWork’s business model has significant overhead costs. With more than 170 locations globally, the company makes up-front, fixed-cost investments designed to benefit the company for many years. Fixed overhead costs at each location include costs of long-term leases as well as materials costs for office build-outs, including glass, wood flooring, aluminum, and modern light fixtures. Variable overhead costs at WeWork include some employee salaries, utilities, office supplies, and micro-roasted coffee available to members at each location.

Matt Rakowski/Shutterstock

Understanding its fixed and variable overhead costs allows WeWork’s management accountants to develop budgeted fixed and variable overhead costs for each desk and office it rents out. It also influences its preferred customer mix. Around a quarter of the company’s revenue comes from large companies such as Microsoft, Facebook, and General Electric. The long-term commitments of these companies allow for more revenue certainty to recover overhead costs. In November 2019, however, WeWork had to withdraw its initial public offering because it had not been able to turn a profit.

In Chapter 7, you learned how managers use flexible budgets and variance analysis to help plan and control the direct-cost categories of direct materials and direct manufacturing labor. In this chapter, you will learn how managers plan for and control the indirect-cost categories of variable manufacturing overhead and fixed manufacturing overhead.