FACTORY OVERHEAD VARIANCE ANALY SIS

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]

VARIANCE ANALYSIS METHODS

The two variance method: The following two variances are calculated: 1. 2. 1. 2. 3. 1. 2. Controllable variance Volume variance Spending variance Idle capacity variance Efficiency variance Spending variance Variable efficiency variance

The three variance method: The following three variances are calculated:

The four variance method: The following four variances are calculated:

3.
4.

Idle capacity variance

Fixed Efficiency variance

FA C T O RY OV E R H E A D VA R I A N C E S 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)

INTRODUCTION TO ORGANIZATION

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.

A N A LY S I S O F I N C R E A S E F O H COST
Rs 000 Factory overhead 2009Factory overhead 2010FOH cost increased by (less) 97,932 (134,452) 36,520

FOH cost has increased in 2010 because of high production,

increased sales and the company earns more profit in 2010.

SWOT ANALY SIS

STRENGTHS:
Brand Image Reasonable quality at low or reasonable price Footwear for the entire family Financially Strong Targeting all income segments Provide training for managers and employees Nationwide retail network

WEAKNESS:
No continuity of leadership In 2001, 5% decrease in net sales

No proper planning regarding

Advertisement No variety in Fashionable shoes

OPPORTUNITIES:
E-Commerce Acquired, Partnership with small players Entering new segments of Markets Capturing Market where no other potential competitor exists Innovative Products New mediums for advertisements

THREATS :
Customer Dissatisfaction Price wars with competitors

Competitors
Political Instability Economic Threat

Changing 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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RECOMMENDATIONS
Bata 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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