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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