Fixed Overhead Budget Variance

Overview

Fixed overhead budget variance is the difference between the budgeted cost of fixed overhead and the actual cost of the fixed overhead that occurs in the production during the period. Likewise, the company can calculate the fixed overhead budget variance with the formula of comparing the budgeted cost of fixed overhead that the company has scheduled in the budget plan for the period to the actual fixed overhead cost that occurs during the period.

With the result of the comparison, if the budgeted cost of fixed overhead is more than the actual fixed overhead cost, it is a favorable fixed overhead budget variance. This means that the company spends less on the fixed overhead than the amount that is budgeted for the period.

On the other hand, if the budgeted fixed overhead is less than the actual cost of fixed overhead that occurs during the period, the result is unfavorable fixed overhead budget variance. This means that the company spends more on fixed overhead than the scheduled amount that it has in the budget plan for the period.

Fixed overhead budget variance formula

The company can calculate the fixed overhead budget variance with the formula of budgeted fixed overhead cost deducting the actual fixed overhead cost.

Fixed overhead budget variance formula:

Budgeted fixed overhead is the planned or scheduled fixed manufacturing overhead cost. Though this estimated fixed overhead cost is easy to predict as it does not vary based on the result of production volume or activity, it can still be different from the actual fixed overhead cost that occurs.

For example, the utility expenses that are classified as a fixed overhead can vary from one period to another. Additionally, the salaries of management and supervisory staff that involve in the production may also change when there is a turnover in these positions. That’s why there is usually a fixed overhead budget variance when the company analyzes the fixed overhead variance in detail.

Actual fixed overhead is the actual cost of fixed overhead that occurs during the period. This figure can be determined with the actual allocation of costs or expenses that are made to the product or production department.

Fixed overhead budget variance example

For example, the company ABC which is a manufacturing company has the budgeted fixed overhead cost for the month of August, as below:

However, the actual cost of fixed overhead that incurs in the month of August is $17,500.

What is fixed overhead budget variance? Is it favorable or unfavorable?

Solution:

With the information in the example, the company ABC can calculate the fixed overhead budget variance with the formula below:

Fixed overhead budget variance = budgeted fixed overhead – actual fixed overhead

Fixed overhead budget variance = $19,000 – $17,500 = $1,500 (F)

With the result above we can conclude that the $1,500 of the fixed overhead budget variance is favorable, in which it means that the company ABC spends less than the budgeted cost in this area by $1,500 in the month of August.

Of course, that doesn’t mean that the total fixed overhead variances can be determined to be favorable yet. We need to check if the fixed overhead volume variance is favorable or unfavorable first. After all, the total fixed overhead variances come from the fixed overhead budget variance plus the fixed overhead volume variance.