Variable Overhead Spending Variance Overview and Example

At $1.50 per unit, the total variable overhead costs increased to $30,000 for the month. However at the end of 2019 due to an incorrect estimation of overheads the actual variable overhead per hour rate was $15 and the actual hours worked were 4,500. Business expansion often creates fixed overheads expenditure variances (also other variances change), that would need adequate justification before approval from top management. As with any variance control, such analysis will provide valuable information, if the actual reasons for deviation are analyzed. By contrast, efficiency variance measures efficiency in the use of the factory (e.g., machine hours employed in costing overheads to the products). This could be for many reasons, and the production supervisor would need to determine where the variable cost difference is occurring to better understand the variable overhead efficiency reduction.

• The quantity and price of indirect materials and labor, utility bills, quality control, and others are forecasted based on expected demand.
• Recall that the standard cost of a product includes not only materials and labor but also variable and fixed overhead.
• Fixed overhead total variance can be divided into two separate variances i.e. fixed overhead spending variance and fixed overhead volume variance.
• This is due to the actual production volume that it has produced in August is 50 units lower than the budgeted one.

This example provides an opportunity to practice calculating the overhead variances that have been analyzed up to this point. In August, the company ABC which is a manufacturing company has produced 950 units of goods in the production. However, the company ABC has the normal capacity of 1,000 units of production for August as they are scheduled to produce in the budget plan. In such a situation, the variance is said to be favorable because the actual costs are less than the budgeted costs. In this case, the variance is favorable because the actual costs are lower than the standard costs. If the outcome is favorable (a negative outcome occurs in the calculation), this means the company was more efficient than what it had anticipated for variable overhead.

8 Fixed Manufacturing Overhead Variance Analysis

In other words, FOH budget variance is the amount by which the total fixed overhead calculated as per the fixed overhead application rate exceeds or falls short of the actual total fixed overhead cost incurred for the period. Actual production volume is the production that the company actually achieves (in hours) or produces (in units) during the period. The figure in hours here can either be labor hours or machine hours depending on which one is more suitable for the measurement in the production. A favorable variance means that the actual hours worked were less than the budgeted hours, resulting in the application of the standard overhead rate across fewer hours, resulting in less expense being incurred. However, a favorable variance does not necessarily mean that a company has incurred less actual overhead, it simply means that there was an improvement in the allocation base that was used to apply overhead. Adverse fixed overhead expenditure variance indicates that higher fixed costs were incurred during the period than planned in the budget.

Beside from its role as a balancing agent, fixed overhead volume variance does not offer more information from what can be ascertained from other variances such as sales quantity variance. Total overhead cost variance can be subdivided into budget or spending variance and efficiency variance. For example, DEF Toy is a toy manufacturer and has total variable overhead costs of $15,000 when the company produces 10,000 units per month. In the following month, the company receives a large order whereby it must produce 20,000 toys.

What is the Fixed Overhead Volume Variance?

Also, if a building must be expanded or the rental of a new production facility is needed to meet increased sales, fixed overhead costs would need to increase to keep the company running smoothly. Fixed overhead costs are costs that do not change even while the volume of production activity changes. Fixed costs are fairly predictable and fixed overhead costs are necessary to keep a company operating smoothly. The fixed overhead costs that are a part of this variance are usually comprised of only those fixed costs incurred in the production process.

Two variances are calculated and analyzed when evaluating fixed manufacturing overhead. The fixed overhead spending variance is the difference between actual and budgeted fixed overhead costs. The fixed overhead production volume variance is the difference between budgeted and applied fixed overhead costs. Two variances are calculated and analyzed
when evaluating fixed manufacturing overhead. The fixed
overhead spending variance is the difference between actual
and budgeted fixed overhead costs. The fixed overhead
production volume variance is the difference between budgeted
and applied fixed overhead costs.

Comparison of Fixed and Variable Overhead Variance

The variable overhead spending variance is unfavorable because the actual variable manufacturing overhead rate ($12.5) is higher than the standard variable manufacturing overhead rate ($12). However, a fixed overhead efficiency variance is adverse or unfavorable when the input labor hours for the actual production are more than the standard hours. The company can calculate fixed overhead volume variance with the formula of standard fixed overhead applied to actual production deducting the budgeted fixed overhead.

Looking at Connie’s Candies, the following table shows the variable overhead rate at each of the production capacity levels. The variable overhead spending concept is most applicable in situations where the production process is tightly controlled, as is the case when large numbers of identical units are produced. https://online-accounting.net/ Fixed overheads spending variance will be the same for both marginal and absorption costing methods. Businesses often give more importance to ADVERSE variances than FAVORABLE variances. Controlling overhead costs is more difficult and complex than controlling direct materials and direct labor costs.

Responsibility of Fixed Overhead Spending Variance

Suppose Connie’s Candy budgets capacity of production at 100% and determines expected overhead at this capacity. Connie’s Candy also wants to understand what overhead cost outcomes will be at 90% capacity and 110% capacity. The following information is the flexible budget Connie’s Candy prepared to show expected overhead at each capacity level.

This variance is reviewed as part of the period-end cost accounting reporting package. The fixed factory overhead variance represents the difference between the actual fixed overhead and the applied fixed overhead. The other variance computes whether or not actual production was above or below the expected production level. business bookkeeping software The total variable overhead cost variance is also found by combining the variable overhead rate variance and the variable overhead efficiency variance. By showing the total variable overhead cost variance as the sum of the two components, management can better analyze the two variances and enhance decision-making.

At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. A favorable variance may be observed in cases where economies of scale are used to advantage to obtain bulk discounts for materials, or when efficient cost control measures are put in place by the management. This difference can then be compared to industry norms or previous periods to interpret its implications for the organization.

If the actual production volume is higher than the budgeted production, the fixed overhead volume variance is favorable. On the other hand, if the actual production volume is lower than the budgeted one, the variance is unfavorable. However, as the name suggested, it is the fixed overhead volume variance that is more about the production volume. Likewise, we can also determine whether the fixed overhead volume variance is favorable or unfavorable by simply comparing the actual production volume to the budgeted production volume. Variable overhead spending variance is favorable if the actual costs of indirect materials — for example, paint and consumables such as oil and grease—are lower than the standard or budgeted variable overheads.

Connie’s Candy used fewer direct labor hours and less variable overhead to produce 1,000 candy boxes (units). Usually, the level of activity is either direct labor hours or direct labor cost, but it could be machine hours or units of production. For example, a non-cash item such as depreciation calculations depend on the costing method adopted by the management. During production, any relevant fixed overhead expenditure changes can be indirect labor, additional insurance charges, additional safety contracts, additional rental or land leases, etc. Suppose a factory has 03 production supervisors totaling monthly wages of $ 15,000. If one of the full time supervisors is on vacation, the slot may remain empty or fulfilled by a part-timer.