Fixed overhead spending variance

Fixed overhead spending variance (also known as fixed overhead budget variance and fixed overhead expenditure variance) is the difference between the actual fixed manufacturing overhead and the budgeted fixed manufacturing overhead for a period.

Fixed overhead spending variance is labeled “unfavorable” if actual fixed manufacturing overhead is more than the budgeted fixed manufacturing overhead and “favorable” if actual fixed manufacturing overhead is less than the budgeted fixed manufacturing overhead.

Fixed overhead spending variance is an important variance for management because it indicates the cost deviations that were not expected at the time of setting standards and budgets.

Formula:

The formula of fixed overhead spending variance is given below:

Fixed overhead spending variance = Actual fixed manufacturing overhead – Budgeted fixed manufacturing overhead

Example 1

The New York manufacturing company estimates that its fixed manufacturing overhead expenses should be $350,000 during the upcoming period. However, the company had to make some addition investment in overhead resources and the actual expenses for the period were therefore higher than expected at $375,000.

Required: Compute fixed manufacturing overhead spending variance for the period.

Solution

Fixed overhead spending variance = Actual fixed overhead – Budgeted fixed overhead
= $375,000 – $370,000
= $15,000 Unfavorable

The fixed overhead spending variance of New York manufacturing company is unfavorable because the actual fixed overhead is higher than the budgeted fixed overhead for the period.

Example 2

(When fixed overhead spending variance is given and budgeted fixed manufacturing overhead is required)

The Washington Company provides you the following information for the month of June 2017:

• Fixed overhead spending variance: $5,000 unfavorable
• Actual fixed manufacturing overhead: $125,000

Required: Compute budgeted fixed manufacturing overhead for the month of June.

Solution

Fixed overhead spending variance = Actual fixed overhead – Budgeted fixed overhead
$5,000 = $125,000 – Budgeted fixed manufacturing over head
$5,000 – $125,000 = -Budgeted fixed manufactured overhead
-$120,000 = -Budgeted fixed manufacturing overhead
Budgeted fixed manufacturing overhead  = $120,000

Note: The negative sign (-) on both sides of the equation has been cancelled.

Example 3

(When fixed overhead spending variance is given and actual fixed manufacturing overhead is required)

The Mexico Company provides you the following information for the month of December 2017:

• Fixed overhead spending variance: $10,000 unfavorable
• Budgeted fixed manufacturing overhead: $450,000

Required: Compute actual fixed manufacturing overhead for the month of June.

Solution

Fixed overhead spending variance = Actual fixed overhead – Budgeted fixed overhead
$10,000 = Actual fixed overhead – $450,000
$10,000 + $450,000 = Actual fixed overhead
Actual fixed overhead = $460,000

Causes of fixed overhead spending variance

Causes of favorable variance:

The main causes of a favorable fixed overhead spending variance include the following:

1. The business process re-engineering, optimization of production facilities or other improvement techniques carried out during the period which resulted in lowering actual fixed overhead.
2. Inaccurate planning at the start of the period.
3. The business expansion planned at the time of setting budgets was not carried out during the period.

Causes of unfavorable variances:

The main causes of an unfavorable fixed overhead spending variance include the following:

1. The business expansion carried out during the period that was not planned at the time of setting budgets.
2. Increase in one or more overhead expenses during the period. For example, an unexpected increase in insurance premium of the factory.
3. Wastage and inefficiencies in the management of fixed overhead.

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