Factory overhead is most commonly defined as "manufacturing costs that are not classifiable as direct material or direct labor." Factory overhead costs include indirect materials, indirect labor, and factory expenses.
In standard costing, predetermined amounts are used to facilitate better control and faster recording of costs. Standard costing allows management to determine areas that deviate from established standards, to be able to investigate and take corrective actions.
Factory overhead costs are better analyzed when they are segregated into variable and fixed.
In this lesson, we will discuss the many ways we can analyze variances in factory overhead costs.
The computation and analysis of variable factory overhead (VFOH) is pretty much similar to that of direct labor.
The only difference is the rate applied. Also, variable overhead rates may use direct labor hours or machine hours as its base.
VFOH variance = Total actual VFOH cost - Total standard VFOH cost
The total actual variable overhead cost and total standard variable overhead cost may be computed as follows:
Total actual VFOH cost = Actual hours used x Actual rate per hour
Total standard VFOH cost = Standard hours for actual production x Standard VFOH rate per hour
Note that the "hour" used refers to direct labor hour or machine hour, depending upon which is used by the company. Capital-intensive industries tend to use machine hours. Other bases may also be used, especially when using activity-based costing.
Variable factory overhead may be split into: VFOH spending variance and VFOH efficiency variance.
VFOH spending variance = (Actual rate - Standard rate) x Actual hours
VFOH efficiency variance = (Actual hours - Standard hours) x Standard rate
The computation for fixed factory overhead (FFOH) variance is similar to that of variable factory overhead. Note, however, that fixed factory overhead amounts are almost always given as the total amount (thus, it may or may not require additional computations).
FFOH variance = Total actual FFOH cost - Total standard FFOH cost
The total actual fixed overhead cost is almost always given in total amount; hence no additional computation is needed. The total standard fixed overhead cost (or applied fixed factory overhead) may be computed as follows:
Total standard FFOH cost = Standard hours for actual production x Standard FFOH rate per hour
Fixed factory overhead variance may be split into: FFOH spending variance (a.k.a. budget variance) and FFOH volume variance (a.k.a. capacity variance).
FFOH spending variance = Actual FFOH - Budgeted FFOH
FFOH volume variance = Budgeted FFOH - Standard FFOH
The budgeted fixed factory overhead is also given in total amount – for a given level of production. The total standard FFOH is computed as shown earlier, and is also known as "applied fixed factory overhead".
Author's Note: This article is a rundown of the different factory overhead variances. FOH variance analysis is kind of a lengthy topic; nonetheless, each of the above variances are explained individually with examples in the dictionary. If you need additional information, feel free to visit the dictionary section of this site.