Fixed overhead spending variance definition
/What is the Fixed Overhead Spending Variance?
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 fixed overhead expenses were greater than anticipated. This is one of the better cost accounting variances for management to review, since it highlights changes in costs that were not expected to change when the fixed cost budget was formulated.
How to Calculate Fixed Overhead Spending Variance
To calculate the fixed overhead spending variance, subtract budgeted fixed overhead from actual fixed overhead. The formula for this variance is as follows:
Actual fixed overhead - Budgeted fixed overhead = Fixed overhead spending variance
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How to Interpret the 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, 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.
Example of the Fixed Overhead Spending Variance
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
As an example of an unfavorable fixed overhead spending variance, a passing tornado delivers a glancing blow to the production facility of Hodgson Industrial Design, resulting in several hundred roofing tiles being blown off. It costs the company $20,000 to replace the tiles. This cost is part of the facilities maintenance budget, which normally does not vary much from month to month, and so is part of the company’s fixed overhead. The result is a $20,000 unfavorable fixed overhead spending variance.