Fixed Overhead Budget Variance

Fixed overhead budget variance (also known as FOH spending variance) is the difference between the total fixed overhead as per the fixed overhead budget for a given accounting period and the total fixed overheads actually incurred during the period.

In other words, FOH budget variance is the amount by which the total fixed overhead calculated as per the fixed overhead application rate exceeds or falls short of the actual total fixed overhead cost incurred for the period.

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 variances which are FOH budget variance and FOH volume variance.

Formula

Fixed Overhead Budget Variance
= Budgeted Fixed Overhead – Actual Total Fixed Overhead

In case of fixed overhead, the budgeted and flexible budget figures are exactly the same.

Analysis

Fixed overhead budget variance is favorable when actual fixed overhead incurred are less than the budgeted amount and it is unfavorable when the actual fixed overheads exceed the budgeted amount.

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.

Example

Steptech Inc. manufactures fitness monitoring products. It estimated its fixed manufacturing overheads for the year 20X3 to be $37 million. The actual fixed overhead expenses for the year 20X3 were $40 million.

Fixed Overhead Budget Variance
= $37 million – $40 million
= $3 million (unfavorable)

The variance is unfavorable because the actual spending was higher than the budget.

by Irfanullah Jan, ACCA and last modified on

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