Fixed Overhead Budget Spending Variance Formula, Example

Volume variance is further sub-divided into efficiency variance and capacity variance. There are a number of reasons why this can happen, aside from simply poor forecasting. If sales on a product are seasonal, production volumes on a monthly basis can fluctuate.

The fixed overhead volume variance looks at how the budgeted overhead costs might change when compared to budgeted overhead costs. The fixed overhead volume variance looks at the overhead variance in terms of the actual volume of units produced against the budgeted number of units produced. Both types of overhead variance formulas can help capture where extra costs are coming from. Companies use an overhead variance formula because they are required to assign a portion of the fixed overhead costs to each product. On the other hand, if the budgeted fixed overhead is less than the actual cost of fixed overhead that occurs during the period, the result is unfavorable fixed overhead budget variance.

Why Use Overhead Variance Formulas?

Because fixed overhead costs are not typically driven by activity, Jerry’s cannot attribute any part of this variance to the efficient (or inefficient) use of labor. Instead, Jerry’s must review the detail of actual and budgeted costs to determine why the favorable variance occurred. For example, factory https://accounting-services.net/fixed-overhead-spending-variance-accountingtools/ rent, supervisor salaries, or factory insurance may have been lower than anticipated. Further investigation of detailed costs is necessary to determine the exact cause of the fixed overhead spending variance. The expectation is that 3,000 units will be produced during a time period of two months.

However, the actual number of units produced is only 2,000, resulting in a total of $50,000 fixed overhead costs. An unfavorable fixed overhead budget variance results when the actual amount spent on fixed manufacturing overhead costs exceeds the budgeted amount. The fixed overhead budget variance is also known as the fixed overhead spending variance. Because fixed overhead costs are not typically driven by
activity, Jerry’s cannot attribute any part of this variance to the
efficient (or inefficient) use of labor. Instead, Jerry’s must
review the detail of actual and budgeted costs to determine why the
favorable variance occurred.

Fixed overhead budget variance example

The calculation of the sub-variances also doesn’t provide a meaningful analysis of fixed production overheads. For example, if the workforce utilized fewer manufacturing hours during a period than the standard, it is hard to imagine a significant benefit of calculating a favorable fixed overhead efficiency variance. The fixed overhead costs included in this variance tend to be only those incurred during the production process, such as factory rent, equipment depreciation, staff salaries, insurance of facilities and utility fees. Therefore, these variances reflect the difference between the standard cost of overheads allowed for the actual output achieved and the actual overhead cost incurred. Calculate the fixed overhead spending and production volume variances using the format shown in Figure 10.13 “Fixed Manufacturing Overhead Variance Analysis for Jerry’s Ice Cream”. Figure 10.14 summarizes the similarities and differences between
variable and fixed overhead variances.

• The fixed overhead
  production volume variance is the difference between budgeted
  and applied fixed overhead costs.
• Fixed overhead budget variance is one of the two main components of total fixed overhead variance, the other being fixed overhead volume variance.
• Specifically, fixed overhead variance is defined as the difference between Standard Cost and fixed overhead allowed for the actual output achieved and the actual fixed overhead cost incurred.
• On the other hand, if the budgeted fixed overhead is less than the actual cost of fixed overhead that occurs during the period, the result is unfavorable fixed overhead budget variance.
• Both types of overhead variance formulas can help capture where extra costs are coming from.
• When the actual amount budgeted for fixed overhead costs based on production volume differs from the figure that is eventually absorbed, fixed overhead volume variance occurs.

Fixed overhead volume variance is the difference between the amount budgeted for fixed overhead costs based on production volume and the amount that is eventually absorbed. This variance is reviewed as part of the cost accounting reporting package at the end of a given period. It is important to start by noting that fixed overhead in the
master budget is the same as fixed overhead in the flexible budget
because, by definition, fixed costs do not change with changes in
units produced. Thus budgeted fixed overhead costs of $140,280
shown in Figure 10.12 will remain the same even though Jerry’s
actually produced 210,000 units instead of the master budget
expectation of 200,400 units. The fixed overhead production volume variance is favorable
because the company produced and sold more units than
anticipated.

What is the Fixed Overhead Spending Variance?

However, if the manufacturing process reaches a step cost trigger point where a whole new expense must be incurred, this can cause a significant unfavorable variance. Also, there may be some seasonality in fixed overhead expenditures, which may cause both favorable and unfavorable variances in individual months of a year, but which cancel each other out over the full year. Other than the two points just noted, the level of production should have no impact on this variance. Fixed Overhead Variance is the difference of standard cost of fixed overhead and the actual cost of fixed overhead.

• Calculate the fixed overhead spending and production volume variances using the format shown in Figure 10.13 “Fixed Manufacturing Overhead Variance Analysis for Jerry’s Ice Cream”.
• This type of variance is calculated separately for direct variable expenses and overhead variable expenses.
• This figure can be determined with the actual allocation of costs or expenses that are made to the product or production department.
• Volume variance is further sub-divided into efficiency variance and capacity variance.
• This variance is positive if the actual amount produced is greater than the budgeted amount and is negative if production is below budgeted levels.

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