Fixed Overhead Spending Variance

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Fixed Overhead Spending Variance

Fixed Overhead Spending Variance Overview

The fixed overhead spending variance is the difference between the actual fixed overhead expense incurred and the budgeted fixed overhead expense. An unfavorable variance means that actual overhead expenditures were greater than planned. The formula is:

Actual fixed overhead - Budgeted fixed overhead = Fixed overhead spending variance

The amount of expense related to fixed overhead should (as the name implies) be relatively fixed, and so the fixed overhead spending variance should not theoretically vary much from the budget. However, if the manufacturing process reaches a step cost trigger point, where a whole new expense must be incurred, then this can cause a significant unfavorable variance. Also, there may be some seasonality in fixed overhead expenditures, which may cause both favorable and unfavorable variances in individual months of a year, but which cancel each other out over the full year. Other than the two points just noted, the level of production should have no impact on this variance.

The fixed overhead spending variance will be unfavorable if the actual overhead costs incurred are greater than the budgeted amount.

Fixed Overhead Spending Variance Example

The production manager of Hodgson Industrial Design estimates that the fixed overhead should be $700,000 during the upcoming year. However, since a production manager left the company and was not replaced for several months, actual expenses were lower than expected, at $672,000. This created the following favorable fixed overhead spending variance:

($672,000 Actual fixed overhead - $700,000 Budgeted fixed overhead) =
$(28,000) Fixed overhead spending variance

Related Podcasts

Episode 111 of the Accounting Best Practices podcast discusses variance analysis. Listen now.