Engineered and discretionary overhead costs

Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012
2
Using a discretionary overhead cost approach, the variances are



Actual costs
incurred
€56,000


Same lump sum
regardless of
output level
20 × 180 × €15
€54,000
Allocated:
Budgeted input
allowed for actual
output achieved
× Budgeted rate
€54,000

€2,000 U
€0
Spending variance Production-volume variance
3
The engineered overhead cost approach assumes that each order can have labour time assigned to it on a cause-and-effect basis. The €3,000 production-volume variance alerts management to the possibility of overstaffing and unused capacity. The discretionary overhead cost approach assumes Stientje cannot identify a cause-and- effect relation between the number of orders processed and labour costs. The control of labour costs is based on the manager’s judgement and experience about likely workloads.

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