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Standard costing and Variance Analysis > Factory Overhead Controllable
Variance - Definition - Explanation - Formula - Calculation - Example
- Interpretation
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Learning Objective of the article: Define and explain factory overhead controllable variance. How FOH controllable variance is calculated? What are the reasons / causes of unfavorable controllable variance? |
Factory Overhead Controllable Variance:
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- Definition
- Formula of factory overhead controllable variance
- Example
- Reasons / causes of unfavorable controllable variance
Definition:
Factory overhead controllable variance is the difference between actual expenses incurred and the budget allowance based on standard hours allowed for work performed.
Factory overhead controllable variance is the responsibility of the department managers to the extent that they can exercise control over the costs to which the variances relate.
Formula of Factory Overhead Controllable Variance:
Following formula is used for the calculation of controllable variance:
[Controllable Variance = Actual factory overhead – Budgeted allowance based on standard hours allowed*]
[*Fixed expenses budgeted + variable expenses (standard hours allowed for actual production × variable overhead rate)]
Example:
Following is the flexible budget of a department of a manufacturing company. The data from this flexible budget is used to calculate all variances relating to factory overhead.
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Department 3 |
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| Capacity | 80% | 90% | 100% | ||
| Standard production | 800 | 1,000 | 1,200 | ||
| Direct labor hours | 3,200 | 4,000 | 4,800 | ||
| Variable factory overhead: | |||||
| Indirect labor | $1,600 | $2,000 | $2,400 | $0.50 / dlh | |
| Indirect materials | 960 | 1,200 | 1,440 | $0.30 | |
| Supplies | 640 | 800 | 960 | $0.20 | |
| Repairs | 480 | 600 | 720 | $0.15 | |
| Power and light | 160 | 200 | 240 | $0.05 | |
| ----------- | ----------- | ----------- | ----------- | ||
| Total variable factory overhead | $3,840 | $4,800 | $5,760 | $1.20 per dlh | |
| ====== | ====== | ====== | ====== | ||
| Fixed factory overhead: | |||||
| Supervisor | $1,200 | $1,200 | $1,200 | ||
| Depreciation on machinery | 700 | 700 | 700 | ||
| Insurance | 250 | 250 | 250 | ||
| Property tax | 250 | 250 | 250 | ||
| Power and light | 400 | 400 | 400 | ||
| Maintenance | 400 | 400 | 400 | ||
| ----------- | ----------- | ----------- | |||
| Total fixed factory overhead | $3,200 | $3,200 | $3,200 | $3,200 per month | |
| ----------- | ----------- | ----------- | ====== | ||
| Total factory overhead | $7,040 | $8,000 | $8,960 |
$3,200 per month + $1.20 per dlh |
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| ====== | ====== | ====== | ====== | ||
Following data is also provided:
Actual factory overhead is $7,384. Actual production is 850 units of finished product. Actual hours used are 3,475 hours. 4 standard hours are allowed to complete a unit of finished product.
Required: Calculate factory overhead controllable variance.
Calculation of Standard Overhead Rate:
Assuming that 90% column represents normal capacity, the standard overhead rate is computed as follows:
Total factory overhead / Direct labor hours
= $8,000 / 4,000
= $2 per standard direct labor hour
At 90% capacity level, the rate consists of:
Total variable factory overhead / Direct labor hours
= $4,800 / 4,000
= $1.20 variable factory overhead rate
Total fixed factory overhead / Direct labor hours
= $3,200 / 4,000
= $0.80 fixed factory overhead rate
Total factory overhead rate at normal capacity:
($1.20 + $0.80) = $2.00
Calculation of Controllable variance:
| Actual factory overhead | $7,384 | ||
| Budgeted allowance based on standard hours allowed: | |||
| Fixed expenses budgeted | $3,200 | ||
| Variable expenses (3,400 standard hours allowed × $1.20 variable overhead rate) | 4,080 | ||
| ---------- | 7,280 | ||
| ----------- | |||
| Controllable variance | $104unfav. | ||
| ====== |
Factory overhead controllable variance consists of variable expenses only and can also be calculated as follows:
| Actual variable expenses ($7,384 actual factory overhead – $3,200 of fixed expenses budgeted) | $4,184 | |
| Variable expenses for standard hours allowed | $4,080 | |
| ---------- | ||
| Controllable variance | $104 unfav. | |
| ====== |
Reasons / Causes of Unfavorable Controllable Variance:
Possible reasons / causes for the unfavorable controllable variance are:
- Indirect materials were purchased from a different supplier with higher costs
- More Indirect materials were used due to waste
- Indirect labor rates were higher due to a change in personnel or higher negotiated raises than budgeted
- Fixed overhead costs were more than budgeted.
You may also be interested in other relevant articles:
- Standard Costs - Management by Exception
- Setting Standard Costs - Ideal Versus Practical Standards
- Direct Materials Price and Quantity Standards
- Direct Materials Price Variance
- Direct Materials Quantity Variance
- Direct Labor Rate and Efficiency Standards
- Direct Labor Rate | Price Variance
- Direct Labor Efficiency | Usage | Quantity Variance
- Manufacturing Overhead Standards
- Overall or net factory overhead variance
- Factory Overhead Volume variance
- Factory Overhead Spending variance
- Factory Overhead efficiency variance
- Variable Overhead efficiency variance
- Fixed overhead efficiency variance
- Factory Overhead idle capacity variance
- Mix and Yield Variance - Definition and Explanation
- Materials Mix and Yield Variance
- Labor Yield Variance
- Factory Overhead Yield variance
- Variance Analysis and Management By Exception
- Managerial importance and usefulness of variance analysis
- Advantages and Disadvantages of Standard Costing System
- Standard Costing Discussion Questions and Answers
- Standard Costing and Variance Analysis Formulas
- Standard Costing and Variance Analysis Problems and Solution
- Standard Costing and Variance Analysis Case Study
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