Definition
In the scope of standard costing, Standard Fixed Overhead Cost refers to the predetermined cost that is calculated based on the standard time allocated for performing an operation or producing a product. This cost is determined using the standard fixed overhead absorption rate per unit of time required for that particular operation or production.
Examples
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Manufacturing Operation: If a company manufactures widgets and it has determined that the standard time to produce one widget is 2 hours, and the standard fixed overhead absorption rate is $5 per hour, the standard fixed overhead cost for one widget would be:
\[ \text{Standard Fixed Overhead Cost} = 2 \text{ hours} \times $5/\text{hour} = $10 \text{ per widget} \]
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Service Industry: In a consultancy firm, if the standard time to complete a client report is set at 4 hours, and the fixed overhead absorption rate is $15 per hour, the standard fixed overhead cost for one report would be:
\[ \text{Standard Fixed Overhead Cost} = 4 \text{ hours} \times $15/\text{hour} = $60 \]
Frequently Asked Questions (FAQs)
What is the significance of Standard Fixed Overhead Cost in accounting?
Answer: Standard Fixed Overhead Cost plays a crucial role in budgeting, cost control, and performance evaluation. It helps in determining the expected costs and setting benchmarks for actual performance.
How is the Standard Fixed Overhead Absorption Rate determined?
Answer: The Standard Fixed Overhead Absorption Rate is determined by dividing the total budgeted fixed overhead costs by the total standard hours of productive operations or activities.
What is the difference between variable and fixed overhead costs?
Answer: Variable overhead costs fluctuate with the level of production or activity (e.g., utilities, raw materials), while fixed overhead costs remain constant regardless of the level of production or activity (e.g., rent, salaries).
Why is it necessary to use standard time for calculating standard fixed overhead costs?
Answer: Using standard time ensures consistency and accuracy in cost calculation by providing a uniform basis for measuring performance and efficiency across different operations or production periods.
How does variance analysis relate to standard fixed overhead costs?
Answer: Variance analysis involves comparing the standard fixed overhead costs to the actual costs incurred, helping in identifying areas of inefficiency or over/under allocation of overheads.
Can standard fixed overhead costs vary across different departments?
Answer: Yes, different departments may have different standard fixed overhead rates based on their specific operations, resource requirements, and productivity levels.
Related Terms
- Standard Costing: A cost accounting method that uses standards for materials, labor, and overhead to control and monitor estimates against actual results.
- Fixed Overhead: Overheads that do not change with the level of production or business activity.
- Absorption Costing: An accounting method that includes all overhead costs, both fixed and variable, in the cost of a product or service.
- Variance Analysis: The process of analyzing the differences between standard costs and actual costs to understand the reasons for variance.
Online References
- Investopedia - Standard Costing
- Accounting Coach - Standard Costing and Variance Analysis
- Corporate Finance Institute - Fixed Overhead
Suggested Books for Further Studies
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan
- “Managerial and Cost Accounting” by Larry M. Walther and Christopher J. Skousen
- “Introduction to Management Accounting” by Charles T. Horngren, Gary L. Sundem, and Jeff O. Schatzberg
Accounting Basics: “Standard Fixed Overhead Cost” Fundamentals Quiz
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