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. This could be for many reasons, and the production supervisor would need fixed overhead spending variance to determine where the variable cost difference is occurring to better understand the variable overhead reduction. They do not vary as the output varies unless a specific point is crossed and it becomes stepped costs instead of fixed costs.
Overhead variances arise when the actual overhead costs incurred differ from the expected amounts. Managers want to understand the reasons for these differences, and so should consider computing one or more of the overhead variances described below. It is not necessary to calculate these variances when a manager cannot influence their outcome. The other component of the total variable overhead variance is the variable overhead efficiency variance.
Variable Overhead Efficiency Variance
Another variable overhead variance to consider is the variable overhead efficiency variance. A favorable https://accounting-services.net/bookkeeping-cincinnati/ arises when the actual fixed overheads incurred by the company are lower than the budgeted fixed overheads. A fixed overhead efficiency variance is favorable when the input labor hours for the actual production are less than the standard hours i.e. more finished goods were produced in lesser time. 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. Standard fixed overhead rate can be calculated with the formula of budgeted fixed overhead cost dividing by the budgeted production volume.
Costs such as direct material and direct labor, on the other hand, vary directly with each unit of output. Fixed overhead spending variance often arises due to change in long-term planning, so any analysis of this will offer top level management valuable reasoning. A line-by-line costing approach can help management to identify the reason for fluctuations and planning gaps. The variable overhead spending concept is most applicable in situations where the production process is tightly controlled, as is the case when large numbers of identical units are produced.
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. 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. Figure 8.5 shows the connection between the variable overhead rate variance and variable overhead efficiency variance to total variable overhead cost variance.
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. Under normal circumstances, factory fixed overheads such as Electricity, Insurance, Indirect labor, and material should remain fixed. However, significant changes in production do require even fixed overheads to be adjusted. With the result above we can conclude that the $1,500 of the fixed overhead budget variance is favorable, in which it means that the company ABC spends less than the budgeted cost in this area by $1,500 in the month of August.
The variance is calculated the same way in case of both marginal and absorption costing systems. With the result of the comparison, if the budgeted cost of fixed overhead is more than the actual fixed overhead cost, it is a favorable fixed overhead budget variance. This means that the company spends less on the fixed overhead than the amount that is budgeted for the period.
However, the actual cost of fixed overhead that incurs in the month of August is $17,500. In August, the company ABC which is a manufacturing company has produced 950 units of goods in the production. However, the company ABC has the normal capacity of 1,000 units of production for August as they are scheduled to produce in the budget plan.
Example of the Variable Overhead Spending Variance
The variance can either be caused by a difference in the fixed overheads at a given level of activity or because of a difference in the number of units produced (which affects the absorption of the overheads). Variable overhead spending variance is essentially the difference between the actual cost of variable production overheads versus what they should have cost given the output during a period. An unfavorable variance may be observed in cases where the cost of indirect labor increases, or when cost control measures prove to be ineffective, or when mistakes are made while planning the budget. Suppose a factory has 03 production supervisors totaling monthly wages of $ 15,000.
- However, the variable standard cost per unit is the same per unit for each level of production, but the total variable costs will change.
- Fixed overhead spending or expenditure variance is the difference between actual fixed overheads incurred by the company and the budgeted fixed overheads that were estimated by the company before the year started.
- The fixed
overhead spending variance is the difference between actual
and budgeted fixed overhead costs.