Managerial Accounting 10.8: Fixed Overhead Variance Analysis - YouTube

This is Kurt Heisinger, accounting professor  at Sierra College and author of Managerial  

Accounting. This video describes the two  variances that are associated with fixed  

manufacturing overhead. Many organizations do  analyze fixed manufacturing overhead. I'll take  

a look at a couple of variances to try to figure  out why costs differed from what was expected in  

the budget. There are two variances, two separate  variances associated with fixed manufacturing  

overhead as you see here. The first is the spending  variance which really analyzes whether we spent  

more or less than we expected to spend on our  fixed overhead. And fixed overhead, these  

are costs that, for example would be related to  the factory, could be the rent on the factory, may  

be we pay for insurance related to the factory.  Those would be fixed overhead examples. And the  

spending variance really is looking at whether  we spent more or less than we expected to spend  

on those types of items. Then we have a second  variance, and it's the fixed overhead production  

volume variance. And this has to do with whether we  produced more product than we expected to produce,  

and it'll come out of this variance. And we will  talk about that in more detail in just a second.

Let's start with the fixed overhead spending  variance. What is it and how do we calculate it.  

I talked a little bit about it in the first slide,  that the fixed overhead spending variance is the  

difference between the actual fixed overhead costs  and the budgeted fixed overhead costs. So it is  

pretty straightforward. What are the actual costs  associated with fixed overhead, what did we expect  

those costs to be, and let's take the difference  and whatever that difference is that is our  

spending variance. If the actual costs are higher  than the budgeted costs then it's an unfavorable  

variance. If the actual costs are lower than the  budgeted costs then it's a favorable variance.  

The fixed overhead costs are typically not driven  by a specific activity, and this is different than  

when we looked at the other variances in separate  lectures, the direct materials variances, the direct  

labor variances, the variable manufacturing  overhead variances. Those are usually driven  

by some specific level of activity some type of  activity. Fixed overhead costs are not as easily  

linked to a specific activity. So our third  bullet point here, managers have to review then  

the detail of the actual costs and the budgeted  cost to find out why is there a difference. If we  

have a favorable or unfavorable variance it takes  some real investigation and diving into  

the records to try to figure out why those actual  costs are higher or lower than expected. Now we will  

take a look at the fixed overhead production  volume variance. So the fixed overhead production  

volume variance is the difference between the  budgeted fixed overhead costs, and I use the term  

fixed overhead and fixed manufacturing overhead  interchangeably, so it is the difference between the  

budgeted overhead, fixed overhead costs and the  applied fixed overhead costs. Most companies  

will apply fixed overhead to products based on  on some method, it could be that they base it on  

direct labor hours, or machine hours, or it could  be an activity-based costing type of a system.  

And the fixed overhead production volume variance  really is simply the difference between what we  

had budgeted for our fixed overhead cost and what  we had applied to our products. And that is what you  

see right down here in this formula. So the fixed  overhead production volume variance, last bullet  

point here, is typically the direct result of the  difference in volume between budgeted production,  

what we expected to produce, and actual production,  what we actually produced. Let's take a look at a  

more detailed example of this on the next slide.  So we are going to work from left to right here  

with this fixed manufacturing overhead variance  analysis. On the left, you will see that we have  

actual fixed overhead costs, and our actual fixed  overhead costs amounted to $136,000. The middle,  

in the middle column, you will see that we had the  flexible budget. This is where we present the  

flexible budget for our fixed overhead costs. And  that flexible budget amounts to $140,280. And there  

is lots of detail in the footnotes down below, so  you can take a look at those if you want  

to know where these numbers come from. And as we  move our way to the right, over the far right, we  

are looking at fixed overhead costs that were  applied to the products. The assumption in this  

example is that we apply our fixed overhead  based on direct labor-hours. So you can see  

that in the footnotes again, you can dive into  the footnotes to see where those numbers come  

from. And the total fixed overhead costs that  were applied to products is $147,000. So let's  

go back over to the left and we'll take  a look at the fixed overhead spending variance,  

which turns out to be favorable. Well the flexible  budget says that we expected to spend $140,280, we  

expected cost of $140,280, related to our fixed  overhead. Turns out actual costs were $136,000.  

So we have a $4,280 favorable fixed overhead  spending variance. And as I mentioned before we  

need to dive into the records to find out why  our actual overhead costs were lower than the  

flexible budget, what we expected to see in fixed  overhead costs. And then as we move our way over to  

the right here, we see the production volume  variance. And the production volume variance  

is the difference between our flexible budget,  that is right here, the 140,280, and the fixed  

overhead costs that were applied to our products  of $147,000. The difference in these two numbers is  

related strictly to the number of units that were  produced and sold which was 210,000 units. If you  

look in the footnotes you will see that and that is  how overhead costs are applied, versus the 200,400  

units that were budgeted to be produced. And that is  related to the flexible budget. So again it is  

production volume variance, and it really is very  descriptive that variance name, because this  

variance relates directly to production volume. We  produced more units than we expected to produce  

and therefore we applied more fixed overhead costs  than were in the flexible budget, and as a result  

we have as you see here a $6,720 favorable  fixed overhead production volume variance.