Factory Overhead Volume Variance
Factory Overhead Volume Variance:
Learning Objective of the article:
- Define and explain factory overhead volume variance.
- How is FOH volume variance calculated?
Contents:
Definition:
Factory overhead volume variance represents the difference between the budget allowance and the standard expenses charged to work in process (standard hours allowed × standard overhead rate)
The volume variance indicates the cost of capacity available but not utilized or not utilized efficiently and is considered the responsibility of the executive and departmental management.
Formula of Factory Overhead Volume Variance:
Factory overhead volume variance is calculated by using the following formula/equation:
[Factory overhead volume variance = Budgeted allowance based on standard hours allowed* – Overhead charged to production**]
*Budgeted fixed expenses + variable expenses (standard hours allowed for actual production × variable overhead rate)
**Standard hours allowed × Standard overhead rate
Example:
Following is the flexible budget of a department of a manufacturing company.
Department 3 |
||||
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 volume 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 volume variance:
Budgeted allowance based on standard hours allowed: | ||
Fixed expenses budgeted | $3,200 | |
Variable expenses (3400 standard hours allowed × $1.20 variable overhead rate) | $4,080 | |
———– | $7,280 | |
Overhead charged to production (3400 standard hours allowed × $2 standard overhead rate) | $6,800 | |
———– | ||
Unfavorable volume variance | $480 Unfav. | |
====== |
Factory overhead volume variance consists of fixed expenses only and can be computed as follows:
Normal capacity hours | 4000 |
Standard hours allowed for actual production | 3400 |
——– | |
Capacity hours not utilized or not utilized efficiently | 600 |
====== | |
Unfavorable volume variance (600 hours × 0.80*) | $480 |
* Fixed expenses rate at normal capacity
The reasons of unfavorable overhead volume variance include the capacity available but not utilized or not utilized efficiently.
You may also be interested in other articles from “standard costing and variance analysis” chapter
- Standard Costs and Management By Exception
- Setting Standard Costs – Ideal Versus Practical Standards
- Direct Materials Price and Quantity Standards
- Direct Materials Price Variance
- Direct Materials Quantity Variance
- Direct Labor Rate and Efficiency Standards
- Direct Labor Rate/Price Variance
- Direct Labor Efficiency | Usage | Quantity Variance
- Manufacturing Overhead Standards
- Overall or net factory overhead variance.
- Controllable variance
- Volume variance
- Spending variance
- Idle capacity variance
- Efficiency variance
- Spending variance
- Variable efficiency variance
- Fixed efficiency variance
- Idle capacity variance
- Mix and Yield Variance – Definition and Explanation
- Materials Mix and Yield Variance
- Labor Yield Variance
- Factory Overhead Yield variance
- Variance Analysis and Management By Exception
- Managerial importance and usefulness of variance analysis
- Advantages and Disadvantages of Standard Costing System
- Standard Costing Discussion Questions and Answers
- Standard Costing and Variance Analysis Formulas
- Standard Costing and Variance Analysis Problems and Solution
- Standard Costing and Variance Analysis Case Study
Other Related Accounting Articles:
- Overall or Net Factory Overhead Variance
- Factory Overhead Efficiency Variance
- Fixed Overhead Efficiency Variance
- Variable Overhead Efficiency Variance
- Factory Overhead Controllable Variance
- Standard Costing and Variance Analysis Formulas
- Factory Overhead Yield Variance
- Direct Labor Yield Variance
- Manufacturing Overhead Cost Standards
- Managerial Usefulness/Importance of Variance Analysis
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