FACTORY OVERHEAD VARIANCE ANALYSIS

PRESENTED BY: AMBER AROOJ

Factory Overhead Variance:Overall or net factory overhead variance is the difference between actually incurred factory overhead and expenses charged into process using the standard factory overhead rate.

Factory Overhead Variance Analysis:Similar variance analysis should be performed to evaluate spending and utilization for factory overhead.

Formula of Overall or Net Factory Overhead Variance:Overall or net overhead variance is calculated by the following formula:

[Actual overhead – Overhead charged to production]

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VARIANCE ANALYSIS METHODSThe two variance method: The following two variances are calculated:1.Controllable variance2.Volume varianceThe three variance method: The following three variances are calculated:vSpending variancevIdle capacity variancevEfficiency variance1.The four variance method: The following four variances are calculated:vSpending variancevVariable efficiency variancevIdle capacity variancevFixed Efficiency variance

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FACTORY OVERHEAD VARIANCES FORMULAS

FOH controllable variance formula: (Actual factory overhead) – (Budgeted allowance based on standard hours allowed*)

FOH volume variance: (Budgeted allowance based on standard hours allowed*) – (Factory overhead applied or charged to production**)

FOH spending variance: (Actual factory overhead) – (Budgeted allowance based on actual hours worked***)

FOH idle capacity variance formula: (Budgeted allowance based on actual hours worked***) – (Actual hours worked × Standard overhead rate)

FOH efficiency variance formula:(Actual hours worked × Standard overhead rate) – (Standard hours allowed for expected output × Standard overhead rate)

VOH efficiency variance formula:(Actual hours worked × Standard variable overhead rate) – (Standard hours allowed × Standard variable overhead rate)

VOH efficiency variance formula: (Actual hours worked × Fixed overhead rate) – (Standard hours allowed × Fixed overhead rate)

FOH yield variance formula: (Standard hours allowed for expected output × Standard overhead rate) – (Standard hours allowed for actual output × Standard overhead rate)

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INTRODUCTION TO ORGANIZATION

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BATA was formed in Pakistan in 1952 It established its feet within very short time Today it serves 1 million customers per day Employs more than 42,000 people Today, it has over 370 outlets in Pakistan. Manages a retail presence in over 50 countries Runs 40 production facilities across 26 countries Bata is still improving its business & it become the most favorite footwear

for people of Pakistan.

ANALYSIS OF INCREASE FOH COST

Rs’ 000

Factory overhead 2009- 97,932

Factory overhead 2010- (less) (134,452)

FOH cost increased by 36,520

FOH cost has increased in 2010 because of high production, increased sales and the company earns more profit in 2010.

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SWOT ANALYSIS

STRENGTHS:Brand ImageReasonable quality at low or reasonable priceFootwear for the entire familyFinancially StrongTargeting all income segmentsProvide training for managers and employeesNationwide retail network

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WEAKNESS:

No continuity of leadershipIn 2001, 5% decrease in net salesNo proper planning regarding

AdvertisementNo variety in Fashionable shoes

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OPPORTUNITIES:E

-CommerceA

cquired, Partnership with small playersE

ntering new segments of MarketsC

apturing Market where no other potential competitor existsI

nnovative ProductsN

ew mediums for advertisements

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THREATS:C

ustomer Dissatisfaction P

rice wars with competitorsC

ompetitorsP

olitical InstabilityE

conomic ThreatC

hanging in consumer preferences

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CONCLUSION

BATA shoe are bearing lots of cost and it may increase with time because it is not possible that actual and standard cost remain same.

Variances create problem for the organization proper arrangement should be made.

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RECOMMENDATIONSB

ata Debt to Equity ratio is 3.51, which means almost 75 % are debts. Due to high debts ratio financial charges are increasing and consuming major portion of profit.

Management has to reduce its debts to reduce the financial charges.

Due to High debts ratio company will also find difficulties if they apply for the loan. Because none of the financial institution will like to invest money due to low equity ratio.

Company's current ratio is 1.17:1 but the favorable and most acceptable is 2:1. So company should try to decrease its liabilities mainly the accrued expenses payable or to increase its current assets to be more positive.

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