Factory Overhead Volume Variance:

Learning Objective of the article:

1. Define and explain factory overhead volume variance.
2. How is FOH volume variance calculated?

1. Definition
2. Formula
3. Example

Definition:

Factory overhead volume variance represents the difference between the budget allowance and the standard expenses charged to work in process (standard hours allowed × standard overhead rate)

The volume variance indicates the cost of capacity available but not utilized or not utilized efficiently and is considered the responsibility of the executive and departmental management.

Formula of Factory Overhead Volume Variance:

Factory overhead volume variance is calculated by using the following formula/equation:

[Factory overhead volume variance = Budgeted allowance based on standard hours allowed* – Overhead charged to production**]

*Budgeted fixed expenses + variable expenses (standard hours allowed for actual production ×  variable overhead rate)

**Standard hours allowed × Standard overhead rate

Example:

Following is the flexible budget of a department of a manufacturing company.

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 volume 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 factory overhead volume variance:

Factory overhead volume variance consists of fixed expenses only and can be computed as follows:

* Fixed expenses rate at normal capacity

The reasons of unfavorable overhead volume variance include the capacity available but not utilized or not utilized efficiently.

 

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