Factory Overhead Spending Variance
Spending Variance in Factory Overhead
Learning Objective of the article:
- Define and explain factory overhead spending variance.
- How is FOH spending variance calculated?
Definition:
Factory Overhead spending variance is the difference between actual expenses incurred and the budgeted allowance based on actual hours worked.
The spending variance is the responsibility of the department manager, who is expected to keep actual expenses within the budget.
Formula of Spending Variance:
[Actual factory overhead – Budgeted allowance based on actual hours worked*]
*[Fixed expenses budgeted + Variable expenses (actual hours worked × variable overhead rate)]
Example:
Following is the flexible budget of a department of a manufacturing company.
Department 3 |
||||
Capacity | 80% | 90% | 100% | |
Standard production | 800 | 1,000 | 1,200 | |
Direct labor hours | 3,200 | 4,000 | 4,800 | |
Variable factory overhead: | ||||
Indirect labor | $1,600 | $2,000 | $2,400 | $0.50 / dlh |
Indirect materials | 960 | 1,200 | 1,440 | $0.30 |
Supplies | 640 | 800 | 960 | $0.20 |
Repairs | 480 | 600 | 720 | $0.15 |
Power and light | 160 | 200 | 240 | $0.05 |
——- | —— | ——- | ———– | |
Total variable factory overhead | $3,840 | $4,800 | $5,760 | $1.20 per dlh |
====== | ====== | ====== | ====== | |
Fixed factory overhead: | ||||
Supervisor | $1,200 | $1,200 | $1,200 | |
Depreciation on machinery | 700 | 700 | 700 | |
Insurance | 250 | 250 | 250 | |
Property tax | 250 | 250 | 250 | |
Power and light | 400 | 400 | 400 | |
Maintenance | 400 | 400 | 400 | |
——- | ——- | ——- | ||
Total fixed factory overhead | $3,200 | $3,200 | $3,200 | $3,200 per month |
——- | ——- | ——- | ====== | |
Total factory overhead | $7,040 | $8,000 | $8,960 | $3,200 per month + $1.20 per dlh |
====== | ====== | ====== | ====== |
Following data is also provided:
Actual factory overhead is $7,384. Actual production is 850 units of finished product. Actual hours used are 3,475 hours. 4 standard hours are allowed to complete a unit of finished product.
Required: Calculate factory overhead spending variance.
Calculation of Standard Overhead Rate:
Assuming that 90% column represents normal capacity, the standard overhead rate is computed as follows:
Total factory overhead / Direct labor hours
= $8,000 / 4,000
= $2 per standard direct labor hour
At 90% capacity level, the rate consists of:
Total variable factory overhead / Direct labor hours
= $4,800 / 4,000
= $1.20 variable factory overhead rate
Total fixed factory overhead / Direct labor hours
= $3,200 / 4,000
= $0.80 fixed factory overhead rate
Total factory overhead rate at normal capacity:
($1.20 + $0.80) = $2.00
Calculation of factory overhead spending variance:
Actual factory overhead | $7,384 | |
Budgeted allowance based on actual hours worked: | ||
Fixed expenses budgeted | $3,200 | |
Variable expenses (3,475 actual hours worked × $1.20 variable overhead rate) | $4,170 | |
———- | $7,370 | |
———- | ||
Unfavorable Overhead spending variance | $14 unfav. |
Overhead spending variance consists of variable expenses only and can be computed as follows:
Actual variable expenses ($7,384 actual variable expenses – $3,200 fixed expenses budgeted) | $4,184 |
Allowed variable expenses for actual hours | 4,170 |
——- | |
Unfavorable spending variance | $14 unfav. |
====== |
By basing the budget allowance on actual hours instead of on standard hours allowed as shown in the controllable variance, the department manager receives a more favorable budget allowance, which reduces the variance from $104 to $14. This reduction is caused by the influence of efficiency ( or, in this case inefficiency), which is identified separately as the variable expense portion of the efficiency variance.
You may also be interested in other articles from “standard costing and variance analysis” chapter
- Standard Costs and Management By Exception
- Setting Standard Costs – Ideal Versus Practical Standards
- Direct Materials Price and Quantity Standards
- Direct Materials Price Variance
- Direct Materials Quantity Variance
- Direct Labor Rate and Efficiency Standards
- Direct Labor Rate/Price Variance
- Direct Labor Efficiency | Usage | Quantity Variance
- Manufacturing Overhead Standards
- Overall or net factory overhead variance.
- Controllable variance
- Volume variance
- Spending variance
- Idle capacity variance
- Efficiency variance
- Spending variance
- Variable efficiency variance
- Fixed efficiency variance
- Idle capacity variance
- Mix and Yield Variance – Definition and Explanation
- Materials Mix and Yield Variance
- Labor Yield Variance
- Factory Overhead Yield variance
- Variance Analysis and Management By Exception
- Managerial importance and usefulness of variance analysis
- Advantages and Disadvantages of Standard Costing System
- Standard Costing Discussion Questions and Answers
- Standard Costing and Variance Analysis Formulas
- Standard Costing and Variance Analysis Problems and Solution
- Standard Costing and Variance Analysis Case Study
Other Related Accounting Articles:
- Factory Overhead Idle Capacity Variance
- Overall or Net Factory Overhead Variance
- Standard Costing and Variance Analysis Problems & Solution
- Direct Labor Rate | Price Variance rate
- Direct Labor Standards
- Direct Labor Efficiency Variance
- Standard Costing and Variance Analysis Case Study
- Direct Materials Quantity Variance
- Advantages and Disadvantages of Standard Costing and Variance Analysis
- Direct Materials Price Variance
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