Overview of FOH cost variance formula

The fixed overhead (FOH) cost variance is analyzed differently than all the previous variances because so far we have discussed costs that vary directly with production levels or variable costs, which includes direct materials, direct labor and variable overhead.

Under standard costing, fixed overhead (FOH) is generally considered independent of production within the relevant range of activity. However, FOH is still applied to units of output using a predetermined standard FOH rate. This rate functions in the same way as the standard labor rate or the standard cost per unit of direct materials, ensuring that each unit produced carries a share of fixed overhead. This approach is known as absorption costing.

Definitions

Absorption costing: Absorption costing is a method of product costing in which all manufacturing costs(i.e. direct materials, direct labor, variable overhead, and fixed overhead) are assigned to units of production.

Under standard costing, fixed overhead is applied to production using a predetermined rate (based on budgeted costs and activity levels). This allocation is central to fixed overhead variance analysis, where differences between applied and actual fixed overhead are measured.

The process of absorption costing means that the total FOH absorbed by inventory and COGS may be different than the budgeted fixed overhead (in the master budget), even though we expect these to be the same as budgeted since they are independent of production. The difference is called over-absorbed FOH or under-absorbed FOH.

Take for example the scenario below:

The over/under absorbed FOH above is effectively the FOH cost variance and is formally represented by the following formula:

$Fixed Overhead Cost Variance = Absorbed FOH - Actual FOH$

Where:

$Absorbed FOH$ is the fixed overhead applied to production using the predetermined FOH rate
$Actual FOH$ is the actual fixed overhead incurred

The absorption of the FOH can be through units produced or hours used depending on the cost driver. The FOH cost variance can be broken down into different components:

Overview of variance formula

The total of all calculated variances should equal the fixed overhead cost variance. This provides a useful way to verify the accuracy of your calculations by comparing the sum of the individual variances to the total FOH cost variance.

From the figure below, it should be noted that you have several options of computing the FOH variances depending on what is the situation.

Formulas for fixed overhead cost, spending, volume, capacity, and efficiency variances. — FOH Variances Formulas

Fixed Overhead (FOH) Cost Variance Basics

FOH treated as independent of production within relevant range
Applied to units using predetermined standard FOH rate (absorption costing)
Absorbed FOH may differ from budgeted FOH, resulting in over- or under-absorbed FOH

Absorption Costing

All manufacturing costs (direct materials, direct labor, variable overhead, fixed overhead) assigned to production units
FOH allocated to inventory and COGS via predetermined rate

FOH Cost Variance Formula

FOH Cost Variance = Absorbed FOH − Actual FOH
- Absorbed FOH: applied to production using standard rate
- Actual FOH: actual fixed overhead incurred

Components and Calculation of FOH Variance

FOH cost variance can be broken into sub-variances (e.g., spending, volume)
Total of all sub-variances equals total FOH cost variance
Multiple formulas available depending on available data and situation