FOH spending variance

Fixed overhead spending variance

The formula for calculating fixed overhead spending variance is:

$$\text{FOH spending variance}=\text{Budgeted FOH}-\text{Actual FOH}$$

Where:

• $\text{Budgeted FOH}$ is the amount of FOH in the master budget
• $\text{Actual FOH}$ is the actual FOH incurred during the period

Fixed costs don’t change with activity, so budgeted FOH is the same in the master budget and the flexible budget - there’s nothing to flex. That’s why this variance compares budgeted FOH to actual FOH rather than applied FOH (standard rate × standard hours allowed); the gap between budgeted and applied FOH is the production volume variance, covered next.

This variance is typically easier to compute since both items are typically readily available. However, the following formulas may also be helpful in case the exam problem provided different inputs:

$$\begin{array}{rl}\text{FOH spending variance}& =\text{(SFR × BU) − (AFR × AU)}\\ & =\text{(SFR × BH) − (AFR × AH)}\end{array}$$

Where:

• $\text{AFR}$ is the actual FOH rate
• $\text{AFR}\times \text{AU}$ (or $\text{AH}$) equals actual FOH, just as $\text{SFR}\times \text{BU}$ (or $\text{BH}$) equals budgeted FOH.
• $\text{SFR}$ is the standard FOH rate. This could be calculated using the master budget.
• $\text{BU}$ are the budgeted units expected to be produced in the master budget.
• $\text{BH}$ are the budgeted hours in the master budget (used when the FOH cost driver is hours rather than units).
• $\text{AU}$ are the actual units produced.
• $\text{AH}$ are the actual hours incurred by production (used when the FOH cost driver is hours rather than units).

A positive variance indicates a favorable outcome, where actual fixed overhead costs were lower than budgeted, while a negative variance signifies an unfavorable outcome, where actual fixed overhead costs exceeded the budget. A favorable result raises operating income, but it isn’t automatically good - deferred maintenance or cancelled training can lower FOH now while raising costs later, so large favorable variances deserve scrutiny too.

Understanding the reasons behind these variances is crucial. For example, if actual FOH exceeds the budgeted amount, it may result from unexpected expenses such as higher maintenance costs or higher factory rent than budgeted, which can negatively impact the company’s financial performance.

Example: FOH spending variance

Budgeted FOH was $120,000 ($10 standard rate × 12,000 budgeted hours), and actual FOH was $126,000.

$120,000 − $126,000 = −$6,000, a $6,000 unfavorable variance. The result doesn’t depend on actual hours worked, since budgeted FOH doesn’t change with activity.

Answer: $6,000 unfavorable

Using the scenarios presented in the previous section, we can calculate the FOH spending variances for each scenario: