Factory Overhead

 If the company is using a flexible budget, the total overhead variance

may be analyzed as follows:
I. Under the Two-Variance Method
II. Three- Variance Method
III. Four –Variance Method
Controllable Variance
Actual Manufacturing Overhead P XX
Less: Budget allowed based on Standard hours
Fixed ( at normal capacity) P XX
Variable (Standard Hours* x var. Overhead
rate) XX XX
Unfavorable(favorable) P XX
______
Capacity Variance
Budget allowed based on Standard hours P XX
Less: Standard hours X Standard Overhead rate XX
Unfavorable (Favorable) P XX
Total Manufacturing Overhead Variance P XX
=====
*Standard Hours = Equiv. Production or
Allowed hours based on actual production X
Standard hours per unit
 Three variance Method
Spending Variance
Actual Manufacturing Overhead P XX
Less: Budget allowed on actual hours
Fixed ( at normal capacity) P XX
Variable (Actual Hours x var. Overhead
rate ) XX XX
Unfavorable(favorable) P XX

Variable Efficiency Variance

Budget allowed on Actual Hours P XX
Less: Budget allowed on Standard Hours
Fixed ( at normal capacity) XX
Variable (Standard hours x variable overhead rate) XX XX
Unfavorable (Favorable) XX

Volume Variance
Budget allowed based on Standard hours P XX
Less: Standard hours X Standard overhead rate XX
Unfavorable(favorable) P XX
Total Overhead Variance P XX
=========
 Four-variance Method
Spending Variance
Actual Manufacturing Overhead P XX
Less: Budget allowed based on actual hours XX
Unfavorable ( Favorable) P XX
Variable Efficiency Variance
Budget allowed based on actual hours P XX
Less: Budget allowed based on standard hours XX
Unfavorable ( Favorable) P XX
Fixed Efficiency or Effectiveness Variance
Standard Hours XX
Less: Actual Hours XX
Unfavorable ( Favorable) XX
Multiplied by: Fixed Overhead rate P X
Unfavorable ( Favorable) XX
Idle Capacity Variance
Normal capacity hours XX
Less: Actual hours XX
Unfavorable ( Favorable) XX
Multiplied by: Fixed overhead rate P X
Unfavorable ( Favorable) XX
TOTAL OVERHEAD VARIANCE P XX
Computations:
 Budgetallowed based on Actual Hours =
[Fixed Overhead + (AH x std VOR)]

 Budgetallowed based on Standard Hours=

[Fixed Overhead + (SH x Std VOR)]
Manufacturing Overhead (Fixed and Variable) Variance Analysi ( Flexible Budget in
Use)
2-Variance 3-Variance 4-Variance
1. Actual overhead cost
Spending Spending
2. Budget allowed based (1-2) ( 1-2)
on Actual Hours Controllable
(1-3) Variable Variable
3. Budget allowed based Efficiency Efficiency
on Standard Hours (2-3) (2-3)
Fixed Efficiency:
4. Actual Hours X Stand. Capacity or Capacity or AH- SH x Fixed OR
Overhead rate Volume Volume
(3-5) ( 3-5) Idle capacity:

5. Standard Hours (NC hours- AH) X

X Standard Overhead Fixed overhead rate
Rate
Alternative analysis presentation:

Spending Variance: (1-2)

Actual overhead costs P XX
Less: BAAH XX
Unfavorable (Favorable) XX

Capacity Variance (2-4)

BAAH P XX
Less: AH x SOR XX
Unfavorable (favorable) P XX

Efficiency (Fixed and Variable ) (4-5)

Actual hours x SOR P XX
Less: SH x SOR XX
Unfavorable ( Favorable) P XX
Net Unfavorable ( Favorable ) Variance P XX
======