Reporting of overhead variances: a cost management perspective |
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Institution: | 1. Department of Chemistry, McNeese State University, Lake Charles, LA, USA;2. Department of Biology, McNeese State University, Lake Charles, LA, USA;3. Department of Biological Sciences, Southeastern Louisiana University, Hammond, LA, USA;4. School of Veterinary Science, University of Sydney, Sydney, Australia |
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Abstract: | In this paper we argue that if cost management is the primary purpose of a costing system, as opposed to external reporting, then it is often appropriate to report overhead variances as a period cost, rather than prorating these variances to various accounts. Further, we argue that reporting variances as a period cost may be appropriate in some situations even if external reporting considerations underlie the design of the cost system. However, a review of the accounting treatment of overhead variances in major cost/managerial accounting textbooks indicates a clear preference for proration of overhead variances between product costs and period expenses, compared to reporting the entire variance as a period cost (expensing). Textbooks typically argue that proration is theoretically more correct and expensing is only acceptable where the variance is immaterial. |
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