COST ACCOUNTING

STANDARD COSTING – Factory Overhead Variances

Factory Overhead Variances

Actual FOH Cost  Actual Hours x Actual FOH Rate
Standard FOH Cost  Standard Hours x Standard Rate
FOH Cost Variance

Factory Overhead Variance Analyses:

Two-Way Variance Analysis:

Actual factory overhead (AFOH) XX

Budget allowed based on standard hours (BASH) XX
Controllable Variance XX

Budget allowed based on standard hours (BASH) XX

Standard factory overhead (SFOH) XX
Volume Variance XX

Three-Way Variance Analysis:

Actual factory overhead (AFOH) XX

Budget allowed based on actual hours (BAAH) XX
Spending Variance XX

Actual hours (AH) XX

Standard hours (SH) XX
Difference XX
X Standard Variable Overhead Rate XX
Variable Efficiency Variance XX

Volume Variance (same with the 2-way analysis) XX

Four-Way Variance Analysis:

Actual fixed factory overhead (AFFOH) XX

Budget allowed based on actual hours – fixed (BAAH-F) XX
Fixed Spending Variance XX

Actual variable factory overhead (AVFOH) XX

Budget allowed based on actual hours – fixed (BAAH-V) XX
Variable Spending Variance XX

Variable Efficiency Variance (same with the 2-way

& 3-way analyses) XX

Volume Variance (same with the 2-way & 3-way analyses) XX

Budget Allowed based on Standard and Actual Hours

Budgeted fixed factory overhead XX

(Standard variable overhead rate x standard hours) XX
Budget allowed based on standard hours XX

Budgeted fixed factory overhead XX

(Standard variable overhead rate x actual hours) XX
Budget allowed based on actual hours XX

Breaking Down Factory Overhead Variances:

2-WAY 3-WAY 4-WAY

Fixed Spending
Spending
Total FOH Controllable Variable Spending
Variance Variable Efficiency
Volume Variable Efficiency
Volume
Volume

Illustration: Factory Overhead Variance Analysis (Two, Three, Four-Way Variance Analysis)

Nezuko Company provides the following production data:

Total standard overhead cost per unit of product: 4 hours at P3.00 per hour = P12.00 per unit
Budgeted Fixed FOH P 20,000
Actual production 2,000 units
Actual FOH (75% fixed) P 26,000
Actual hours 7,500 hours
Normal production 2,500 units

Required: Compute for the following:

1. Total factory overhead variance

2. Controllable variance.
3. Volume variance
4. Spending variance
5. Variable efficiency variance
6. Fixed spending variance
7. Variable spending variance

1)
Actual factory overhead (AFOH) P 26,000
Standard factory overhead (SFOH) 24,000
Total factory overhead variance P 2,000 - U
 * Standard factory overhead rate P 3.00
X Standard hours (4 hours x 2,000 units) 8,000
Standard factory overhead (SFOH) P 24,000

2)
Actual factory overhead (AFOH) P 26,000
Budget allowed based on standard hours (BASH):
Budgeted fixed overhead P 20,000
(Std. Var. OH rate x SH)
P1* x 8,000 8,000 28,000
Controllable Variance P 2,000 - F

Fixed FOH rate P 2*

Standard FOH rate P3
Variable FOH rate ? P1

* Budgeted fixed overhead P 20,000

Budgeted hours 10,000**
Standard fixed overhead rate P2

** Budgeted hours 10,000

Budgeted production 2,500
Standard hours per unit 4

3)
Budget allowed based on standard hours (per No. 2) P 28,000
Standard factory overhead (per No. 1) 24,000
Volume Variance P 4,000 - U

2-way Analysis:

Controllable variance P 2,000 - F

Volume variance 4,000 - U
Total FOH variance P 2,000 - U

4)
Actual factory overhead (AFOH) P 26,000
Budget allowed based on actual hours (BAAH):
Budgeted fixed overhead P 20,000
(Std. Var. OH rate x AH)
P1 x 7,500 7,500 27,500
Spending Variance P 1,500 - F

5)
Actual hours 7,500
Standard hours (per No. 2) 8,000
Difference 500 - F
X Standard Variable Overhead Rate P1
Variable Efficiency Variance P 500 - F

3-way Analysis:
 Spending Variance P 1,500 – F
Variable Efficiency Variance 500 – F
Volume Variance 4,000 – U
Total FOH variance P 2,000 – U

6)
Actual fixed factory overhead (P26,000 x 75%) P 19,500
Budget allowed based on actual hours – fixed (per No. 4) 20,000
Fixed Spending Variance P 500 – F

7)
Actual variable factory overhead (P26,000 x 25%) P 6,500
Budget allowed based on actual hours – fixed (per No. 4) 7,500
Variable Spending Variance P 1,000 – F

4-way Analysis:

Fixed Spending Variance P 500 – F

Variable Spending Variance 1,000 – F
Variable Efficiency Variance 500 – F
Volume Variance 4,000 – U
Total FOH variance P 2,000 – U

Important Notes: Factory Overhead Variance Analysis

 SFOH = SH x Standard FOH Rate. Under standard costing, SFOH is likewise referred to as the
Applied FOH.

 If AFOH > SFOH, then FOH is said to be under-applied; hence, under-application indicates an
unfavorable variance, while over-application indicates a favorable variance.

 The term capacity variance is also used to mean the volume variance.

 Budget Variance = Actual Cost – Budgeted Cost = Actual FOH – Budgeted FOH (BFOH)
* If BFOH is adjusted based on SH (BASH), then budget variance is controllable variance.
* If BFOH is adjusted based on AH (BAAH), then budget variance is spending variance.

 Volume variance is actually the Fixed Volume Variance; there is no such thing as a variable
volume or variable capacity variance.

 Under the 3-way approach, the FOH Efficiency Variance is actually the Variable Efficiency
Variance. Other than “BAAH-BASH”, variable overhead efficiency variance may also be
computed based on: (AH-SH) x VR

 FOH variances may be classified into:

* Variable FOH Variances = VSV + VEV
* Fixed FOH Variances = FSV + FVV

 Alternatively, another FOH variance analysis may include the following variances (NOTE: this
version is not included in the board exam syllabus for Management Services):
 * IDLE Capacity Variance: BAAH – (AH x SOR)
* TOTAL Efficiency Variance: (AH-SH) x SOR
* FIXED Efficiency Variance (Effectiveness) Variance: (AH-SH) x FR

 Manufacturing Efficiency Variance incorporates the effect of both FOH Efficiency Variance and
Labor Efficiency Variance. In rare cases, the materials quantity variance may also be included.

 DM Variance + DL Variance + FOH Variance = Production or Manufacturing Cost Variance.

Variances in the Ledger Accounts

Variances usually do not appear on the FS of a company. They are used for managerial control
and are recorded in the ledger accounts.