Fixed Overhead Budget Variance
Fixed overhead budget variance is the difference between total fixed overhead budgeted for a given accounting period and actual fixed overheads incurred during the period. This variance is favorable when actual fixed overhead incurred are less than the budgeted amount and it is unfavorable when actual fixed overheads exceed the budgeted amount. Fixed overhead budget variance is also known as fixed overhead spending/capacity/expenditure variance.
Even though fixed overheads are assumed to be fixed, their actual figure may differ from the amount estimated at the start of the period and this difference is represented by fixed overhead budget variance. When the total of fixed overhead expenses actually incurred during a given accounting period exceeds the budgeted amount, there is a favorable fixed overhead budget variance and this variance is unfavorable vice versa.
Causes of fixed overhead budget variance include:
- budgeted fixed overhead being inaccurate
- unplanned expansion of production capacity resulting in step costs
- unexpected changes in prices
Fixed overhead budget variance is one of the two main components of total fixed overhead variance, the other being fixed overhead volume variance. Fixed overhead budget variance is typically small compared to volume variance.
The calculation of this variance is straight forward compared to FOH volume variance.
Fixed Overhead Volume Variance = Actual Fixed Overhead - Budgeted Fixed Overhead
As per above formula, a positive figure indicates a favorable variance whereas a negative figure means an unfavorable variance.
Steptech Inc. manufactures fitness monitoring products. It estimated its fixed manufacturing overheads for the year 2013 to be $37 million. The actual fixed overhead expenses for the year 2013 were $40 million.
Fixed Overhead Budget Variance = $37 - $40 = $3 million (unfavorable)
Written by Irfanullah Jan