Fixed Overhead Variance

Because fixed overhead costs are not typically driven byactivity, Jerry’s cannot attribute any part of this variance to theefficient (or inefficient) use of labor. Instead, Jerry’s mustreview the detail of actual and budgeted costs to determine why thefavorable variance occurred. For example, factory rent, supervisorsalaries, or factory insurance may have been lower thananticipated. Further investigation of detailed costs is necessaryto determine the exact cause of the fixed overhead spendingvariance. 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.

Fixed overhead volume variance formula

This means that they must have had an unexpected earning of $80,000 positively affecting the financial statements. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others. Finance Strategists is a leading financial education organization that connects people with financial professionals, priding itself on providing accurate and reliable financial information to millions of readers each year.

What is Variance Analysis? Definition, Explanation, 4 Types of Variances

Let’s assume that in 2023 DenimWorks manufactures (has actual good output of) 5,300 large aprons and 2,600 small aprons. Let’s also assume that the actual fixed manufacturing overhead costs for the year are $8,700. As we calculated earlier, the standard fixed manufacturing overhead rate is $4 per standard direct labor hour. An unfavorable or adverse fixed overhead spending variance would arise when the actual fixed overheads the fixed overhead spending variance is calculated as: exceed the budgeted fixed overheads. The fixed overhead volume variance is also one of the main standard costing variances, and is the difference between the standard fixed overhead allocated to production and the budgeted fixed overhead. This result of $950 of unfavorable fixed overhead volume variance can be used together with the fixed overhead budget variance to determine the total fixed overhead variance.

Analysis:

• Adverse fixed overhead expenditure variance indicates that higher fixed costs were incurred during the period than planned in the budget.
• Either way, it is simply the difference in spending from budgeted and actual fixed overhead costs.
• In this rare scenario, we can assume that production department cannot be held responsible for fixed overhead variances.
• It is likely that the amounts determined for standard overhead costs will differ from what actually occurs.
• By contrast, efficiency variance measures efficiency in the use of the factory (e.g., machine hours employed in costing overheads to the products).
• A line-by-line costing approach can help management to identify the reason for fluctuations and planning gaps.

Fixed overhead spending variance, also known as fixed overhead expenditure variance, measures the difference between actual fixed costs incurred and the budgeted fixed costs. Unlike other operating variances such as variable overhead efficiency variances, we typically assume the fixed overheads to remain unchanged. Changes in fixed overheads require approvals from top management, so they become top level management responsibility.

By contrast, efficiency variance measures efficiency in the use of the factory (e.g., machine hours employed in costing overheads to the products). Fixed overhead costs are expenses that do not vary with changes in production or sales volume, such as rent, insurance, property taxes, and depreciation. In our example, we budgeted the annual fixed manufacturing overhead at $8,400 (monthly rents of $700 x 12 months).

An overhead cost variance is the difference between how much overhead was applied to the production process and how much actual overhead costs were incurred during the period. Therefore, these variances reflect the difference between the standard cost of overheads allowed for the actual output achieved and the actual overhead cost incurred. Figure 10.14 summarizes the similarities and differences betweenvariable and fixed overhead variances. Notice that the efficiencyvariance is not applicable to the fixed overhead varianceanalysis.

Another variable overhead variance to consider is the variable overhead efficiency variance. As a result, the company has an unfavorable fixed overhead variance of $950 in August. This is due to the actual production volume that it has produced in August is 50 units lower than the budgeted one. Standard fixed overhead applied to actual production is the fixed overhead cost that is applied to the actual production volume using the standard fixed overhead rate. The budgeted production volume here is also referred to as the normal capacity of the company or the existing facility in the production. Likewise, if the actual production exceeds the normal capacity, the result is favorable fixed overhead volume variance and vice versa.

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. In this case, although the supervisor wages are a fixed overhead expenditure, yet the company sees a Favorable spending variance of $ 2,500 for one month. Total overhead cost variance can be subdivided into budget or spending variance and efficiency variance. The difference between the actual amount of fixed manufacturing overhead and the estimated amount (the amount budgeted when setting the overhead rate prior to the start of the year) is known as the fixed manufacturing overhead budget variance. On the other hand, the budgeted production volume is the production volume that the company estimates to produce or achieve during the period.

This variance provides insights into how effectively a company is managing its fixed overhead expenses in the context of its operations and production activities. On the other hand, if the budgeted fixed overhead cost is bigger instead, the result will be unfavorable fixed overhead volume variance. This means that the actual production volume is lower than the planned or scheduled production. The fixed overhead spending variance is the difference between the actual fixed overhead expense incurred and the budgeted fixed overhead expense. An unfavorable variance means that actual fixed overhead expenses were greater than anticipated. This is one of the better cost accounting variances for management to review, since it highlights changes in costs that were not expected to change when the fixed cost budget was formulated.

Fixed overhead variances are particularly important when it comes to variance analysis. A variance analysis compares all the budgeted figures with the actual figures and analyzes the reasons behind such differences. It is one of the two parts of fixed overhead total variance; the other is fixed overhead volume variance. 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. Under normal circumstances, factory fixed overheads such as Electricity, Insurance, Indirect labor, and material should remain fixed.