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.

 Department 3 Monthly Flexible Budget 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.

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.