Factory Overhead Spending Variance

Learning Objective of the article:

1. Define and explain factory overhead spending variance.
2. 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.

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:

Overhead spending variance consists of variable expenses only and can be computed as follows:

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

1. Standard Costs and Management By Exception
2. Setting Standard Costs - Ideal Versus Practical Standards
3. Direct Materials Price and Quantity Standards
4. Direct Materials Price Variance
5. Direct Materials Quantity Variance
6. Direct Labor Rate and Efficiency Standards
7. Direct Labor Rate/Price Variance
8. Direct Labor Efficiency | Usage | Quantity Variance
9. Manufacturing Overhead Standards
10. Overall or net factory overhead variance.
11. Controllable variance
12. Volume variance
13. Spending variance
14. Idle capacity variance
15. Efficiency variance
16. Spending variance
17. Variable efficiency variance
18. Fixed efficiency variance
19. Idle capacity variance
20. Mix and Yield Variance - Definition and Explanation
21. Materials Mix and Yield Variance
22. Labor Yield Variance
23. Factory Overhead Yield variance
24. Variance Analysis and Management By Exception
25. Managerial importance and usefulness of variance analysis
26. Advantages and Disadvantages of Standard Costing System
27. Standard Costing Discussion Questions and Answers
28. Standard Costing and Variance Analysis Formulas
29. Standard Costing and Variance Analysis Problems and Solution
30. Standard Costing and Variance Analysis Case Study

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