Factory Overhead Spending Variance

Spending Variance in Factory Overhead

Learning Objective of the article:

Define and explain factory overhead spending variance.
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.

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:

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.

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