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. Because fixed overhead costs are not typically driven by activity, Jerry’s cannot attribute any part of this variance to the efficient (or inefficient) use of labor.
Favorable fixed overhead expenditure variance suggests that actual fixed costs incurred during the period have been lower than budgeted cost. Fixed Overhead Expenditure Variance, also known as fixed overhead spending variance, is the difference between budgeted and actual fixed production overheads during a period. The calculated variable overhead spending variance may be classified as favorable and non-favorable.
When the Fixed Overhead Volume Variance Can Occur
A higher actual fixed cost means that the targeted profit wasn’t achieved and the actual profit is lower than the budgeted profit. An unfavorable spending variance does not necessarily mean that a company is performing poorly. It could mean fixed overhead spending variance that the standard used as the basis for the calculation was too aggressive. For example, the purchasing department may have set a standard price of $2.00 per widget, but that price may only be achievable if the company purchases in bulk.
Fixed overheads are a line item in our variance analysis because a fixed overhead is not supposed to vary, as the name suggests. In this case, the variance is favorable because the actual costs are lower than the standard costs. In such a situation, the variance is said to be favorable because the actual costs are less than the budgeted costs. The spending variance for direct materials is known as the purchase price https://accounting-services.net/advantages-and-disadvantages-of-the-corporate-form/ variance, and is the actual price per unit minus the standard price per unit, multiplied by the number of units purchased. This example provides an opportunity to practice calculating the overhead variances that have been analyzed up to this point. If the outcome is favorable (a negative outcome occurs in the calculation), this means the company was more efficient than what it had anticipated for variable overhead.
12.9: Fixed Manufacturing Overhead Variance Analysis
Because fixed overhead costs are not typically driven by
activity, Jerry’s cannot attribute any part of this variance to the
efficient (or inefficient) use of labor. Instead, Jerry’s must
review the detail of actual and budgeted costs to determine why the
favorable variance occurred. For example, factory rent, supervisor
salaries, or factory insurance may have been lower than
anticipated. Further investigation of detailed costs is necessary
to determine the exact cause of the fixed overhead spending
variance. Interpretation of the variable overhead rate variance is often difficult because the cost of one overhead item, such as indirect labor, could go up, but another overhead cost, such as indirect materials, could go down. Often, explanation of this variance will need clarification from the production supervisor.
- The spending variance for fixed overhead is known as the fixed overhead spending variance, and is the actual expense incurred minus the budgeted expense.
- By contrast, efficiency variance measures efficiency in the use of the factory (e.g., machine hours employed in costing overheads to the products).
- On the other hand, if the budgeted fixed overhead cost is bigger instead, the result will be unfavorable 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. Fixed overheads spending variance will be the same for both marginal and absorption costing methods. Businesses often give more importance to ADVERSE variances than FAVORABLE variances.