Fixed Overhead Variance Analysis
For all three of the prior variance analysis methods, we had a price variance and an efficiency variance. Now we’re getting into fixed overhead variance analysis, which is different.
The main element making fixed overhead variance analysis unique is that we have to allocate fixed overhead, meaning that our total fixed overhead costs do not change regardless of the number of units we make, whereas they did change with the other three areas of analysis.
For fixed overhead, we create an allocation rate, which is:
Total estimated fixed overhead costs / Total estimated number of units to produce
Then throughout the period, every time we produce one unit, we record the allocation rate. Since there are only two elements that go into this calculation, that means that there are only two things that can actually change.
One is that you spent more or less in fixed overhead than you expected, and two is that you created more units or fewer units than you expected to.
Let’s first find the fixed overhead spending variance. Spending variance sounds like price variance, but it is different. Spending variance asks, “How much in total did we pay for fixed overhead versus how much we expected to pay?”
Let’s say you expected to pay $20,000 in fixed overhead, then if you actually paid $22,000, you would have an unfavorable spending variance of $2,000.
Fixed Overhead Spending Variance Formula
Fixed Overhead Spending Variance = Standard Total Fixed Overhead Costs – Actual Total Fixed Overhead Costs
The production volume variance asks, “Did we create more units or fewer units than we expected to?”
Fixed Overhead Production Volume Variance = (Standard Units to Produce – Actual Units to Produce) X Fixed Overhead Allocation Rate
We take the difference between the actual number of units produced and the estimated number of units produced. We then multiply that difference by the allocation rate.
Practice Question - Fixed Overhead
Now let’s consider a problem where we thought that we would produce 20,000 units and
we only produced 19,000 units.
Actual Budgeted
Number of Frames Manufactured 19,000 20,000
Variable Overhead Costs $4,100 $2 per Direct Labor Hour
Fixed Overhead Costs $22,000 $20,000; $1 Per Unit
Direct Labor Hours 2,100 Hours 0.1 Hours Per Frame
We initially thought our fixed overhead would cost $20,000 and that we would produce 20,000 units. This means we are going to allocate $1 of fixed overhead per unit produced ($20,000 / 20,000 units), but then we only ended up producing 19,000 units instead of 20,000. We produced 1,000 fewer units, meaning that we allocated $1,000 less than we expected. We thought we would allocate 20,000 X $1 = $20,000 but we only actually allocated 19,000 X $1 = $19,000, for a $1,000 variance. This $1,000 production volume variance is unfavorable.
Fixed Overhead Production Volume Variance Formula = (Standard Units to Produce – Actual Units to Produce) X Fixed Overhead Allocation Rate Since expected to spend $20,000 in fixed overhead and we actually spent $22,000, we have a $2,000 unfavorable fixed overhead spending variance.
Fixed Overhead Spending Variance = Standard Total Fixed Overhead Costs – Actual Total Fixed Overhead Costs