# Illustration - Problem

A factory was budgeted to produce 2,000 units of output @ one unit per 10 hours productive time working for 25 days. 40,000 for variable overhead cost and 80,000 for fixed overhead cost were budgeted to be incurred during that period.

The factory worked for 26 days putting in 860 hours work every day and achieved an output of 2,050 units. The expenditure incurred as overheads was 49,200 towards variable overheads and 86,100 towards fixed overheads.

Working Table
Standard Actual Absorbed
Budgeted for AO for AI for AP
A B C
a) Output (units)
b) Days
c) Time (hrs)
1) Variable
2) Fixed
3) Total
2,000
25

40,000
80,000
1,20,000
2,050
26

49,200
86,100
1,35,300

The working table is populated with the information that can be obtained as it is from the problem data. The rest of the information that is present in a full fledged working table that we make use of in problem solving is filled below.

# Formulae - Fixed Overhead Expenditure Variance ~ FOHEXPV

Is the actual fixed overhead cost incurred different from the budgeted fixed overhead cost?

Fixed Overhead Expenditure Variance is the difference between the budgeted fixed overhead cost and the actual fixed overhead incurred.

⇒ Fixed Overhead Expenditure Variance (FOHEXPV)

 = BC − AC Budgeted Cost − Actual Cost

In problem solving the budgeted fixed cost is generally provided as a calculated figure.

Where the budgeted cost is not known we may have to calculate the cost. This calculation requires a measure of budgeted activity and the relevant rate.

Budgeted Cost ~ BC(F)

 = BO × BR/UO Or = BI × BR/UI Or = BP × BR/UP

Actual cost incurred is ascertained from the financial information.

Where the actual fixed overhead cost incurred is not known, it can be calculated based on actual measure of the factor used for absorbing overheads like output, time worked etc. provided the related actual rate of overhead incurred is also known.

Actual Cost ~ AC

 = AO × AR/UO Or = AI × AR/UI Or = AP × AR/UP

We restrict our discussion to the most common measures of activity, units of output, time worked for inputs and days for periods.

## Formula in useful forms

 FOHEXPV = BC − AC Budgeted Cost − Actual Cost

## Note

• BC, BR/UO, BR/UI, BR/UP, AC, AR/UO, AR/UI, AR/UP in the above calculations pertains to fixed overheads.
• Theoretically there are many possibilities. Only those that provide peculiar routes to solve problems are given as an academic exercise.
• Finding the costs by building up the working table and using the formula involving costs is the simplest way to find the FOHEXPV.

# Solution (in all cases)

Since the formula for this variance does not involve absorbed overhead, the basis of absorption of overhead is not a factor that influences the calculation of this variance.

The only data needed is the budgeted and actual fixed overhead costs.

 FOHEXPV = BC − AC = 80,000 − 86,100 = − 6,100 [Adv]

# Fixed Overhead Expenditure Variance - Miscellaneous Aspects

• ## Nature of Variance

Based on the relations derived from the formulae for calculating FOHEXPV, we can identify the nature of Variance

• BC ___ AC

The variance would be

• zero when =
• Positive when >
• Negative when <
• ## Interpretation of the Variance

The following interpretations may be made

### No Variance

The actual cost incurred is the same as the budgeted cost

### Favourable/Favorable

The actual cost incurred is the lesser than the budgeted cost

The actual cost incurred is the greater than the budgeted cost
• ## Who is answerable for the Variance?

Fixed Overhead Expenditure Variance represents the gain or loss on account of the expenditure incurred towards fixed overhead. Those who are responsible for paying/authorising the expenses would be made answerable for the variance.

# Formulae using Inter-relationships among Variances

1. FOHEXPV = FOHCV − FOHVOLV

## Verification

The interrelationships between variances would also be useful in verifying whether our calculations are correct or not.

Since the calculation of fixed overhead expenditure variance is not influenced by the method of absorption used, the value of the variance would be the same in all cases.

Basis of Absorption
Output Input
(Time)
Periods
(Days)
VOHABSV
+ VOHEFFV
+ VOHEXPV
0
− 3,720
− 4,480
+ 3,720
− 3,720
− 4,480
+ 600
− 3,720
− 4,480
a) VOHCV − 8,200 − 4,480 − 7,600
FOHCALV
+ FOHCAPV
+ FOHEFV

FOHVOLV
FOHEXPV
+ 2,000
− 6,100
+ 9,440
− 6,100
+ 3,200
− 6,100
b) FOHCV − 4,100 + 3,340 − 2,900
TOHCV (a) + (b) − 12,300 − 1,140 − 10,500

To enable understanding we have worked out the illustration under the three possible scenarios of overhead being absorbed on output, input and period basis.

Please be aware that only one of these methods would be in use.