Explain how the variance analysis relating to overheads differ from that relating to material and labour

Variance analysis is a technique used to analyze and understand the difference between the actual cost and the standard cost.

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In the context of manufacturing, variance analysis is commonly used to identify and analyze the causes of differences between actual costs and standard costs of direct materials, direct labor, and manufacturing overheads.

The variance analysis of overheads differs from the variance analysis of material and labor in several ways.

  1. Nature of costs: Overheads are indirect costs that cannot be directly attributed to a specific unit of production. On the other hand, material and labor costs are direct costs that can be traced directly to a specific unit of production. Therefore, overhead costs are generally more difficult to control and monitor than material and labor costs.
  2. Apportionment of costs: Overheads are generally apportioned to cost centers or production departments based on pre-determined rates, while material and labor costs are directly assigned to individual products or jobs. This means that the apportionment of overhead costs can be more complex and subjective than the assignment of material and labor costs.
  3. Variance calculation: The calculation of variances for overheads is more complex than that for material and labor costs. Overheads are generally divided into fixed and variable components, and the calculation of variances involves analyzing both fixed and variable components separately.
  4. Impact on profit: The variance analysis of overheads can have a significant impact on profit margins. Since overheads are apportioned across cost centers, any inaccuracies in the apportionment rates can lead to significant variances, which can affect the overall profitability of the business. In contrast, variances in material and labor costs may have a less significant impact on profit margins.

In summary, while the basic principles of variance analysis apply to all cost components, the nature of overhead costs makes their variance analysis more complex than that of material and labor costs.

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