1999 Volume 50 Issue 5 Pages 299-307
The traditional method of variance analysis of variable overhead costs under standard costing simply analyzes total variance into efficiency variance and budget variance. But this method implicitly assumes a linear function in production department and service department activities. Therefore, budget variance may include efficiency variances of service departments. The purpose of this paper is to propose a new variance analysis model. The model includes a simultaneous equation method in order to allocate service department costs. It also considers multiple-activities that are quantities of output, activities levels of production department, activities of service departments services, activities of service departments, and quantities and prices of service departments cost elements. There are two methods to propose this allocation method, causal relationship, and sensitivity analysis. The former notices all routes from service departments and production departments to products. It leads to a suitable solution, but needs many calculations. This paper proposes a simpler method. The new method, firstly, sets up an allocation model using a simultaneous equation. Secondly, we calculate the service departmental charge with variables, which are represented by "standard variables" (model 1) . Thirdly, we change one "standard variable" to an "accrual variable" (model 2). Lastly, we define the overhead cost variables by the differences between the cost of a product calculated by models 1 and 2. The proposed method investigates the usefulness of this model by representing the mathematical formulations and providing the possibility of furnish useful information for cost control.
