Definition
Fixed Overhead Expenditure Variance, also known as fixed overhead spending variance, is the difference between budgeted and actual fixed production overheads during a period.
Formula
Fixed Overhead Expenditure Variance:
= Actual Fixed Overheads – Budgeted Fixed Overheads
Example
Motors PLC is a manufacturing company specializing in the production of automobiles.
Information relating to its fixed manufacturing overhead expense of last period is as follows:
| Million | ||
|---|---|---|
|
|
|
$ |
|
Actual fixed overheads |
A |
526 |
|
Budgeted fixed overheads |
B |
500 |
Fixed Overhead Expenditure Variance = (A – B) = $26 Adverse
Explanation
Fixed Overhead Spending Variance is calculated to illustrate the deviation in fixed production costs during a period from the budget. The variance is calculated the same way in case of both marginal and absorption costing systems. As under marginal costing fixed overheads are not absorbed in the standard cost of a unit of output, fixed overhead expenditure variance is the only variance relating to fixed overheads calculated under marginal costing (i.e. fixed overhead expenditure variance is equal to fixed overhead total variance under marginal costing system).
Analysis
Favorable fixed overhead expenditure variance suggests that actual fixed costs incurred during the period have been lower than budgeted cost.
Reasons for a favorable variance may include:
- Planned business expansion, which was anticipated to cause a stepped increase in fixed overheads, not being undertaken during the period.
- Cost rationalization measures carried out during the period aimed at reducing fixed overheads by elimination of inefficiencies (e.g. through process re-engineering and optimization of the usage of shared resources and facilities).
- Planning inaccuracies (e.g. actual salary raise being lower than anticipated in budget).
Adverse fixed overhead expenditure variance indicates that higher fixed costs were incurred during the period than planned in the budget.
An adverse variance may be caused by the following:
- Expansion of business undertaken during the period, which was not taken into consideration in the budget setting process, causing a stepped increase in fixed overheads.
- Inefficient fixed overheads management (e.g. due to empire building pursuits of senior management).
- Planning errors (e.g. increase in insurance premium being higher than budget due to changes in the risk profile of business).