Factory Overhead Volume Variance

Factory Overhead Volume Variance:

Learning Objective of the article:

  1. Define and explain factory overhead volume variance.
  2. How is FOH volume variance calculated?

Contents:

  1. Definition
  2. Formula
  3. Example

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
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 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

  1. Standard Costs and Management By Exception
  2. Setting Standard Costs – Ideal Versus Practical Standards
  3. Direct Materials Price and Quantity Standards
  4. Direct Materials Price Variance
  5. Direct Materials Quantity Variance
  6. Direct Labor Rate and Efficiency Standards
  7. Direct Labor Rate/Price Variance
  8. Direct Labor Efficiency | Usage | Quantity Variance
  9. Manufacturing Overhead Standards
  10. Overall or net factory overhead variance.
  11. Controllable variance
  12. Volume variance
  13. Spending variance
  14. Idle capacity variance
  15. Efficiency variance
  16. Spending variance
  17. Variable efficiency variance
  18. Fixed efficiency variance
  19. Idle capacity variance
  20. Mix and Yield Variance – Definition and Explanation
  21. Materials Mix and Yield Variance
  22. Labor Yield Variance
  23. Factory Overhead Yield variance
  24. Variance Analysis and Management By Exception
  25. Managerial importance and usefulness of variance analysis
  26. Advantages and Disadvantages of Standard Costing System
  27. Standard Costing Discussion Questions and Answers
  28. Standard Costing and Variance Analysis Formulas
  29. Standard Costing and Variance Analysis Problems and Solution
  30. Standard Costing and Variance Analysis Case Study


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