1. Variance Analysis: Manufacturing Overhead
ACG 4361
Variance Analysis: Manufacturing Overhead
Prepared by
Diane Tanner
University of North Florida
5-4

2. Overhead Variances – Level 4
Variances that exist due to differences in fixed (FOH) and variable overhead (VOH) costs
Five variable overhead variances
VOH spending variance
VOH efficiency variance
VOH production volume variance
VOH flexible budget variance
Total VOH variance
Five fixed overhead variances
FOH spending variance
FOH efficiency variance
FOH production volume variance
FOH flexible budget variance
Total FOH variance

3. Overhead Rates and Allocation with Standard Costing
Estimated VOH
Variable OH rate =
Estimated Activity Allowed
Estimated FOH
Fixed OH rate =
Overhead allocation
Allocated on the basis of the overhead rate times the standard quantities of the allocation bases allowed for the actual outputs produced
Applied VOH
= [VOHR × Standard Quantity Allowed for Actual Output]
Applied FOH
= [FOHR × Standard Quantity Allowed for Actual Output]]

4. Variable Overhead Variances
Actual VOH Cost
Actual DLH x VOH Rate
VOH Flexible Budget
Applied VOH
VOH Spending Variance
VOH Efficiency Variance
VOH Production Volume Variance
VOH Flexible Budget Variance
VOH Production Volume Variance
Total VOH Variance
This is the underapplied or overapplied variable overhead amount.
F = overapplied
U = underapplied

5. Fixed Overhead Variances
Actual FOH Cost
FOH Static Budget
FOH Flexible Budget
Applied FOH
FOH Spending Variance
FOH Efficiency Variance
FOH Production Volume Variance
FOH Flexible Budget Variance
FOH Production Volume Variance
Total FOH Variance
This is the underapplied or overapplied fixed overhead amount.
F = overapplied
U = underapplied

6. Predictable Variances
Two variances that always have zero balances
VOH production volume variance
Amount allowed per activity on the flexible budget is the same as the VOH applied
FOH efficiency variance
It is not possible to reduce a FOH cost simply by being more efficient.
A variance for which the reason for existence is known in advance
FOH production volume variance
Exists because the company operated at a different activity level than planned

7. VOH Overhead Variance Interpretations
VOH spending variance
The company saved $ by paying less for variable overhead items than allowed in the budget
Favorable
Unfavorable
The company incurred additional $ by paying more for variable overhead items than allowed in the budget
VOH efficiency variance
The company saved $ by using less variable overhead items than allowed in the budget
Favorable
Unfavorable
The company incurred additional $ by using more variable overhead items than allowed in the budget

8. VOH Overhead Variance Interpretations
VOH production volume variance
Favorable
Will always be zero because VOH is applied at the same rate as allowed in the flexible budget
Unfavorable
VOH flexible budget variance
The company saved $ by using less and/or paying less for variable overhead items than allowed in the budget
Favorable
Unfavorable
The company incurred more $ by using more and/or paying more for variable overhead items than allowed in the budget

9. VOH Overhead Variance Interpretations
Total VOH variance
Favorable
The amount by which VOH overhead applied exceeds actual VOH incurred
Unfavorable
The amount by which actual VOH incurred exceeds VOH overhead applied
VOH
Does not represent a ‘cost’ or ‘savings’
Exists due to how VOH is accounted for
Actual VOH
Applied VOH
Underapplied
Overapplied

10. FOH Overhead Variance Interpretations
FOH spending variance
The company saved $ by paying less for fixed overhead items than allowed in the budget
Favorable
Unfavorable
The company incurred additional $ by paying more for fixed overhead items than allowed in the budget
FOH efficiency variance
Favorable
Will never exist. A company cannot reduce a fixed cost simply by using the fixed resource more efficiently
Unfavorable

11. FOH Overhead Variance Interpretations
FOH production volume variance
Indicates the company incurred more activity than estimated in the static budget
Favorable
Indicates the company incurred less activity than estimated in the static budget
Unfavorable
FOH flexible budget variance
The company saved $ by using less and/or paying less for fixed overhead items than allowed in the budget
Favorable
Unfavorable
The company incurred more $ by using more and/or paying more for fixed overhead items than allowed in the budget

12. FOH Overhead Variance Interpretations
Total FOH variance
Favorable
The amount by which FOH overhead applied exceeds actual FOH incurred
Unfavorable
The amount by which actual FOH incurred exceeds FOH overhead applied
FOH
Does not represent a ‘cost’ or ‘savings’
Exists due to how FOH is accounted for
Actual FOH
Applied FOH
Underapplied
Overapplied

13. Overhead Variance Responsibility
Spending variances
Purchasing manager – negotiates pricing with suppliers
Production supervisor – if he selects specific OH items to be purchased
Efficiency variances
Production supervisor – controls use of overhead items
Production volume variance
No one is responsible  We know why it exists.
Exists because the volume of production/sales is less/more than budgeted

14. Behavioral Considerations
Standard costs and variance analysis can
Provide very useful control measures
Aid in performance evaluations
Cause dysfunctional behavior among employees and managers

15. The End