Two-way analysis of factory overhead variance

- Introduction
- Components of two-way FOH variance analysis
- Example and explanation
- Key takeaways

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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*.

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.

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.

Key Takeaways

In this lesson, you learned how to perform a 2-way analysis of factory overhead variance. A two-way variance analysis consists of budget variance and volume variance.

Web link

APA format

Two-way factory overhead variance analysis (2022). Accountingverse.

https://www.accountingverse.com/managerial-accounting/standard-costing/two-way-analysis.html

https://www.accountingverse.com/managerial-accounting/standard-costing/two-way-analysis.html

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