Modern Watch Company: Integrating Concepts from Actual and Standard Costing and Fixed Overhead Variance Analysis

• In Event: Teaching Resources: Managerial and Cost Accounting

Abstract

This case requires students to progress from actual costing to normal costing to standard costing in such a way as to impress upon students the importance of using this building block approach in order to fully understand overhead analysis. The case demonstrates how interim financial statements based on actual costing can lead to deceptive management conclusions and can also possibly lead companies to make inappropriate decisions. The case emphasizes the close connection between normal costing and standard costing as the key to unlocking the challenges of grasping Fixed Overhead Variances in standard costing variance analysis. Students will learn to calculate pre-determined overhead rates and variable and fixed overhead variances. Students will write memos to management of a company analyzing and explaining variances. Finally, students will learn the cause of the Production Volume Variance and the reason for the absence of a Fixed Overhead Efficiency Variance. By requiring students to make calculations and explain concepts of cost accounting to management of a company, this case will help students overcome common problems with learning cost accounting concepts.

Authors

• Maia J Farkas, California State University, Fullerton

• Lee Michael Kersting, Northern Kentucky University

• William Stephens, University of South Florida