12 9: Fixed Manufacturing Overhead Variance Analysis Cost Accounting

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.

• Further investigation of detailed costs is necessary to determine the exact cause of the fixed overhead spending variance.
• If the outcome is unfavorable (a positive outcome occurs in the calculation), this means the company was less efficient than what it had anticipated for variable overhead.
• All these lower budgeted expenses are then summed up and a standard cost of variable overheads is calculated.
• Typically, variable overhead costs tend to be small in relation to the amount of fixed overhead costs.
• † $140,280 is the original budget
  presented in the manufacturing overhead budget shown in Chapter 9.

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.

Overhead Variances

Fixed overhead capacity variance measures the difference between the actual and expected output based on fixed costs incurred in production. Fixed overhead variances measure the over-or https://online-accounting.net/ under-absorption of fixed overheads. If you’re interested in finding out more about fixed overhead volume variance, then get in touch with the financial experts at GoCardless.

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.

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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. 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.

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.

.css-g8fzscpadding:0;margin:0;font-weight:700;When can fixed overhead volume variance occur?

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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.

Variable Overhead Spending Variance

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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.

How to Calculate Fixed Overhead Spending Variance

The calculated variable overhead spending variance may be classified as favorable and non-favorable. It implies that the actual costs of consumables such as oil and grease are lower than what was accounted for. The standard variable overhead rate can be expressed in terms of the number of hours worked. Depending on the kind of production, considerations such as whether the production process is carried out manually or by automation, or as a combination of both, become important. Companies usually use a combination of manual and automated processes in production operations.

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.

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. The production department what is adjusting entries is usually responsible for unfavorable variable overhead spending variance. As in the marginal costing method, overheads are written off to the income statement, so the only variance occurring will be the overheads expenditure variance.