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Two-Way Factory Overhead Variance Analysis

Introduction

The two-way analysis of factory overhead shows the difference between the total actual and total standard FOH costs split into two components: budget variance and volume variance.

In a Nutshell

In this lesson, you will learn how to perform a 2-way analysis of factory overhead variance.

We will discuss how to calculate the budget variance and volume variance and how to know if the variance is favorable or not.

An example of the 2-way variance analysis will also be presented.

Components of the Two-Way Analysis

The two-way analysis consists of:

1.) budget variance (also known as controllable variance), and

2.) volume variance.

These variances are computed as follows.

Budget variance = Variable spending variance + Variable efficiency variance + Fixed budget variance
     
Volume variance = Fixed volume variance

Alternatively, the budget variance may be computed as the difference between actual factory overhead and budget allowed based on standard hours. If the actual FOH is greater than the budget allowed, the variance is unfavorable; otherwise, favorable.

The volume variance is the difference between the budget allowed on standard hours and the standard factory overhead. If the budget allowed is greater than the standard FOH, the variance is unfavorable.

Example

Company XYZ produces a product that has the following factory overhead standard costs per unit. The budgeted production is at the normal capacity of 1,000 units, requiring a budgeted time of 3,000 hours. The total fixed factory overhead at this capacity is $30,000.

Variable FOH 3 hours at $30 per hour
Fixed FOH 3 hours at $10 per hour

During the month, the company produced 1,100 units and incurred the following actual factory overhead costs:

Variable FOH (3,250 hours at $29 / hour) $  94,250
Fixed FOH   $  36,500
Total   $130,750

The two-way analysis variances can be computed as follows:

BUDGET VARIANCE
  Actual FOH $130,750  
  Budget allowed on standard hours 129,000  
     *for variable (1,100 x 3 hours x $30)    
     *for fixed ($30,000 as budgeted)    
  Budget variance $   1,750 UF
       
VOLUME VARIANCE    
  Budget allowed on standard hours $129,000  
  Standard FOH (1,100 x 3 hours x $40) 132,000  
  Volume variance $   3,000 F
       
TOTAL FACTORY OVERHEAD VARIANCE $   1,250 F

The favorable variance of $1,250 in total factory overhead costs is brought about by a $1,750 unfavorable budget variance and a $3,000 favorable volume variance.

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