Measuring Productivity 217capture their change. The reverse is also true. A net that is too fine can capture
a great deal of random noise. Consider, for instance, a product whose price
f luctuates randomly around a fixed mean. If all you want is to see the true ex-
ceptions, then you should set the net to capture only those f luctuations that are
greater than a certain number of standard deviations away from the mean.
“In short, fixed costs are best controlled in the long run and at a more ag-
gregate level. In other words, it is important in the budgetary control of fixed
costs to establish appropriate time and space horizons for one’s analysis.”
“Those are all good points,” said Tom, “and it’s good to be reminded of
them. What you haven’t yet told me, though, is whether there is a fixed over-
head rate like the variable overhead rate that you had in Exhibit 7.3 and how
the fixed overhead rate fits into the whole picture.”
“ Well, fixed overhead does and doesn’t have a rate,” responded Jane.
“The rate itself comes from knowing the total fixed overhead and dividing it by
the volume; for example, the budgeted fixed overhead of $4,000 divided by the
budgeted 1,000 units gives us a fixed overhead rate of $4.00. In a sense, fixed
overhead rates are secondary—unlike variable overhead rates, which are pri-
mary, meaning that fixed overhead rates are computed by dividing the total
overhead by volume. Total variable overhead, on the other hand, is computed
by multiplying the variable overhead rate by the volume. In other words, fixed
overhead computes just the other way round from variable overhead.
“ Variable overhead rates are used in computing variances and indices.
Fixed overhead rates are completely ignored in this context. Their main pur-
pose is to give you an estimate of the total product cost. We computed earlier
that the estimated variable cost of a ream of letterhead was $7.00. We can now
add the $4.00 fixed cost in and say the estimated total cost of a ream is $11.00.
So fixed overhead rates fit in when calculating unit product costs. It’s just that
they don’t fit into the rest of the budgetary control systems. But let’s talk about
standard cost systems when all this might become clearer. Let’s pick it up to-
morrow when we are both fresher.”
STANDARD COST ACCOUNTING SYSTEMS
“Companies rarely enter their budgets into their ledgers. Usually budgetary
control takes place outside of the books of the company. In other words, the
budget is typically drawn up using spreadsheets outside of the general ledger
system. At the end of the period under investigation, the actual results are
drawn out of the ledger and transferred to the spreadsheet where the compar-
isons are done. Two exceptions to this general rule occur.”
Government Accounting
“The first exception does not affect private companies but does affect state
and local governments. It is common practice in their accounting systems to