Overhead: Factory Functional Analysis

Factory overhead is most commonly defined as “manufacturing costs that are not classifiable as direct material or direct labor.”

Factory overhead costs include indirect materials, indirect labor, and factory expenses.

In standard costing, predetermined amounts are used to facilitate better control and faster recording of costs. Standard costing allows management to determine areas that deviate from established standards, to be able to investigate and take corrective actions.

Factory overhead costs are better analyzed when they are segregated into variable and fixed.

Variable Factory Overhead Variance

The computation and analysis of variable factory overhead (VFOH) is pretty much similar to that of direct labor.

The only difference is the rate applied. Also, variable overhead rates may use direct labor hours or machine hours as its base.

VFOH variance = Total actual VFOH cost – Total standard VFOH cost

The total actual variable overhead cost and total standard variable overhead cost may be computed as follows:

Total actual VFOH cost = Actual hours used x Actual rate per hour

Total standard VFOH cost = Standard hours for actual production x Standard VFOH rate per hour

Note that the “hour” used refers to direct labor hour or machine hour, depending upon which is used by the company. Capital-intensive industries tend to use machine hours. Other bases may also be used, especially when using activity-based costing.

VFOH Spending and Efficiency Variances

Variable factory overhead may be split into: VFOH spending variance and VFOH efficiency variance.

VFOH spending variance = (Actual rate – Standard rate) x Actual hours

VFOH efficiency variance = (Actual hours – Standard hours) x Standard rate

Fixed Factory Overhead Variance

The computation for fixed factory overhead (FFOH) variance is similar to that of variable factory overhead. Note, however, that fixed factory overhead amounts are almost always given in total figures (thus, it may or may not require additional computations).

FFOH variance = Total actual FFOH cost – Total standard FFOH cost

The total actual fixed overhead cost is almost always given in total amount; hence no additional computation is needed. The total standard fixed overhead cost (or applied fixed factory overhead) may be computed as follows:

Total standard FFOH cost = Standard hours for actual production x Standard FFOH rate per hour

FFOH Spending and Volume Variances

Fixed factory overhead variance may be split into: FFOH spending variance (a.k.a. budget variance) and FFOH volume variance (a.k.a. capacity variance).

FFOH spending variance = Actual FFOH – Budgeted FFOH

FFOH volume variance = Budgeted FFOH – Standard FFOH

The budgeted fixed factory overhead is also given in total amount – for a given level of production. The total standard FFOH is computed as shown earlier, and is also known as “applied fixed factory overhead”.

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