An Alternative Vertical Approach to Analyzing Overhead Variances
Philip Little, Lynn K. Saubert · Academy of Accounting and Financial Studies journal · 1997
INTRODUCTION Variance analysis has traditionally been among the more difficult topics for cost and managerial students to comprehend. Various methods have been suggested for presenting this material in a manner that will simplify calculations and facilitate an understanding of the resulting variances. Among these methods the most commonly used are the formula approach and the horizontal diagram approach, both of which are illustrated in many textbooks. Alternative approaches include a common sense approach (Chow, 1988), a graphic approach (Martin & Laughlin, 1988), and a vertical approach (Smith, 1991). While the techniques may vary, all of the methods attempt to simplify the calculations of the variances and promote an understanding and appreciation of the meaning of the resultant numbers. The purpose of this article is to present an alternative model which builds on Smith's (1991) vertical model for analyzing overhead variances. First, the four basic components of our vertical model which comprise combinations of actual and standard costs of production are explained. Next, our vertical format for calculating manufacturing overhead variances using the four components is presented. Finally, an example is included to illustrate the applicability of our model for analyzing overhead variances. Our vertical model for analyzing overhead presented in this paper should enhance students' understanding and learning in calculating two-way, three-way and four-way overhead variances. For comparison purposes, a review of other approaches is provided in the next section. OTHER APPROACHES TO OVERHEAD VARIANCE ANALYSIS Several approaches have been suggested to enhance the classroom presentation of variance analysis and enable students to more readily comprehend the concepts and calculations covered. Chow (1988) advocated a common sense approach which presented a written explanation of the variances. This approach, to be used to reinforce the traditional approaches, was designed to enhance the student's understanding of the underlying reasoning behind the variances. Referred to as a non-formula approach, the article consists of a series of formulas, using words instead of numbers. A graphic approach to variance analysis was developed by Martin and Laughlin (1988). Using a series of overhead transparencies which present a logical progression of the development of the variances, students are provided a visual graphic illustration of the components of the variances. This method is also intended to supplement the traditional formula and diagram approaches. An alternative format for presenting variance calculations, referred to as the Vertical Method, was developed by Smith (1991). In this model fixed and variable overhead computations are integrated into a single formula, which, according to Smith, facilitates the preparation of journal entries as well as the calculation of the variances. Two features of this study are relevant to our article. First, by referring to educational psychology literature on learning organizers and learning transfer, he provided theoretical support for his vertical model to assist in organizing learning (pg. 81). Second, a classroom experiment, which tested the effectiveness of the traditional horizontal versus his vertical instructional approach indicated students in the vertical section scored significantly higher on variance exam questions than did the students in the horizontal sections even after controlling for grade point average factors. These results support the development of models which enhance students' understanding and comprehension of difficult academic topics. While the basic initial feature of our model is similar to Smith's vertical model, we extend the framework to provide a structural means of organizing, calculating and identifying the nature of the variance. Similar to the alternative approaches discussed, we do not advocate rote memorization of formulas and computations. …