A Variable Overhead Cost Variance Analysis when Reciprocal Services don't Exist

Abstract

The traditional method of a variance analysis of variable overhead costs under standard costing has simply analyzed the total variance into an efficiency variance and a budget variance. But this method implicitly assumes a linear function of production department activity and of service department activity. Therefore, a budget variance may include efficiency variances of service departments.

The purpose of this paper is to propose a new variance analysis model under multiple-activities which are quantities of output, quantities of spoilage, production levels of production departments, quantities of service department services, production levels of service department, quantities of service department cost elements, and prices of service department cost elements. This paper examines these items using the following three models:

(1) only 1-production department model

(2) 1-production department and 1-service department model

(3) m-production departments and n-service departments model

The proposed method investigates the usefulness of this model by representing the mathematical formulation, and provides the possibility to furnish useful infomation for cost control.