What is Fixed Overhead Spending Variance? Definition, Formula, Explanation, And Analysis

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What is Fixed Overhead Spending Variance? Definition, Formula, Explanation, And Analysis

† $140,280 is the original budget
presented in the manufacturing overhead budget shown in Chapter 9. The flexible budget amount for fixed overhead does not change with
changes in production, so this amount remains the same regardless
of actual production. † $140,280 is the original budget presented in the manufacturing overhead budget shown in Chapter 9 „How Are Operating Budgets Created?”.

An unfavorable or adverse fixed overhead spending variance means that the company’s actual fixed costs exceeded the fixed costs the company had budgeted beforehand. A favorable fixed overhead spending variance occurs when the actual fixed costs incurred by the company are less than actually incurred costs. The standard variable overhead rate is typically expressed in terms of the number of machine hours or labor hours depending on whether the production process is predominantly carried out manually or by automation. A company may even use both machine and labor hours as a basis for the standard (budgeted) rate if the use both manual and automated processes in their operations.

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This variance is reviewed as part of the period-end cost accounting reporting package. The amount of expense related to fixed overhead should (as the name implies) be relatively fixed, and so the fixed overhead spending variance should not theoretically vary much from the budget. However, if the manufacturing process reaches a step cost trigger point where a whole new expense must be incurred, this can cause a significant unfavorable variance. Also, there may be some seasonality in fixed overhead expenditures, which may cause both favorable and unfavorable variances in individual months of a year, but which cancel each other out over the full year. Other than the two points just noted, the level of production should have no impact on this variance.

Because of the simplicity of prediction, some companies create a fixed overhead allocation rate that they continue to use throughout the year. This allocation rate is the expected monthly amount of fixed overhead costs, divided by the number of units produced (or some similar measure of activity level). The fixed overhead costs that are a part of this variance are usually comprised of only those fixed costs incurred in the production process. Examples of fixed overhead costs are factory rent, equipment depreciation, the salaries of production supervisors and support staff, the insurance on production facilities, and utilities. Recall that the standard cost of a product includes not only materials and labor but also variable and fixed overhead. It is likely that the amounts determined for standard overhead costs will differ from what actually occurs.

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We commonly call The fixed overhead spending variance as fixed overhead expenditure variance or fixed production overhead expenditure variance. Before going further detail, let’s have a look at overview and the basic definition. A favorable variance means that the actual variable overhead expenses incurred per labor hour were less than expected. Adverse fixed overhead expenditure variance indicates that higher fixed costs were incurred during the period than planned in the budget.

Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License . Motors PLC is a manufacturing company specializing fixed overhead spending variance in the production of automobiles. This means that they must have had an unexpected earning of $80,000 positively affecting the financial statements.

Comparison of Fixed and Variable Overhead Variance

For example, a company budgets for the allocation of $25,000 of fixed overhead costs to produced goods at the rate of $50 per unit produced, with the expectation that 500 units will be produced. However, the actual number of https://accounting-services.net/the-formula-for-the-future-value-of-an-annuity-due/ units produced is 600, so a total of $30,000 of fixed overhead costs are allocated. On the other hand, if the budgeted fixed overhead cost is bigger instead, the result will be unfavorable fixed overhead volume variance.

fixed overhead spending variance

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