Cost Management

FIXED
FACTORY
OVERHEAD
FACTORY
OVERHEAD
VARIABLE
FACTORY
OVERHEAD
Production Volume 80,000 90,000 100,000
Factory Overhead:
Fixed 80,000 80,000 80,000
Variable 120,000 135,000 150,000
Total 200,000 215,000 230,000
Factory Overhead per unit:

Fixed 1.00 0.888 0.80
Variable 1.50 1.500 1.50
Total Unit Overhead Cost 2.50 2.388 2.30
VARIABLE OVERHEAD VARIANCES
- result from a comparison of actual
variable costs with the flexible budget (applied)
variable FOH.
FIXED OVERHEAD VARIANCES

- result when there is a difference
between the budgeted fixed expenses and the
absorbed fixed OH.
NOTE: The variances associated with the variable and

fixed FOH permit management to measure the success
or failure of its control of overhead and utilization of
facilities.
STANDARD FACTORY OVERHEAD RATE
- A predetermined rate that is usually
based on direct labor hours. Other bases may
be used, e.g. direct labor pesos or machine
hours.
Note: Through the preparation of a Flexible

Budget, we will be able to determine the
Standard FOH Rate.
MONTHLY FLEXIBLE BUDGET
Capacity 80% 90% 100%
Standard Prod. 8,000 10,000 12,000
DL Hours 3,200 4,000 4,800
Variable FOH:
Indirect Labor 16,000 20,000 24,000
Indirect Materials 9,600 12,000 14,400
Supplies 6,400 8,000 9,600
Repairs 4,800 6,000 7,200
Power and Light 1,600 2,000 2,400
Total Variable FOH 38,400 48,000 57,600
Fixed FOH:
Supervisor 12,000 12,000 12,000
Depreciation of PPE 7,000 7,000 7,000
Insurance 2,500 2,500 2,500
Property Tax 2,500 2,500 2,500
Power and Light 4,000 4,000 4,000
Maintenance 4,000 4,000 4,000
Total Fixed FOH 32,000 32,000 32,000
TOTAL FOH 70,400 80,000 89,600
COMPUTATIONS:
𝑻𝒐𝒕𝒂𝒍 𝑭𝑶𝑯 𝑷𝟖𝟎,𝟎𝟎𝟎

SFOHR= = = P 20.00
𝑫𝒊𝒓𝒆𝒄𝒕 𝑳𝒂𝒃𝒐𝒓 𝑯𝒐𝒖𝒓𝒔 𝟒,𝟎𝟎𝟎
𝑻𝒐𝒕𝒂𝒍 𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑭𝑶𝑯 𝑷𝟒𝟖,𝟎𝟎𝟎

VFOHR= = = P 12.00
𝑻𝒐𝒕𝒂𝒍 𝑭𝒊𝒙𝒆𝒅 𝑭𝑶𝑯 𝑷𝟑𝟐,𝟎𝟎𝟎

FFOHR= = = P 8.00
FACTORY OVERHEAD STANDARD COST
Standard hours x Standard Factory

allowed Overhead Rate
Where:
Standard Hours allowed = labor hours to
produce 1 unit x actual number of units
produced.
FACTORY OVERHEAD VARIANCES
Overall (net) FOH Variance- the difference

between overhead actually incurred and overhead
charged using Standard FOH Rate.
• Two-way Method
• Three-way Method
• Four-way Method
Illustrative Example:
Actual Overhead P 73,840
Standard Hours Allowed 3,400
Actual Hours Used 3,475
* 850 EUP x 4 standard direct labor hours per unit of
production
Overall FOH Variance:

Actual Overhead P 73,840
Overhead Charged to Prod
( 3,400 x P 20) (68,000)
Overall FOH Variance P 5, 840 UNFAV.
Two Variance Method
1. Controllable Variance- difference between actual
expenses and the budget allowance based on standard hours
allowed for work performed.
Actual FOH P 73, 840

Budget allowance based on
Standard hours allowed:
Fixed expense budgeted 32,000
Variable Expense
( 3,400 x P 12) 40,800 P 72, 800
Controllable Variance P 1, 040 Unfav.
This variance is the responsibility of the dept. managers to

the extent that they can exercise control costs to which
variances relate.
Two Variance Method
2. Volume Variance- the difference between the
budget allowance and the standard expenses charged to
production.
Budget Allowance P 72,800

Overhead Charged to Prod
(3,400 x P 20.00) (68,000)
Volume Variance P 4,800 Unfav.
This variance indicates the costs of capacity available but not

utilized efficiently.
Three Variance Method
1. Spending Variance- the difference between actual
expenses incurred and the budget allowance based on actual
hours worked.
Actual FOH P 73,840

Actual Hours worked:
Fixed Expenses 32,000
Variable Expense
(3,475 x P 12) 41,700 (73,700)
Spending Variance P 140 unfav.
The spending variance is the responsibility of the dept
manager who is expected to keep actual expenses within the
budget.
2. Idle Capacity- difference between the budget
allowance based on actual hours and actual hours worked
times the standard FOH rate.
Budget Allowance P 73, 700

Actual Hours X SFOH Rate
( 3,475 X P 20) (69,500)
Idle Capacity Variance P 4, 200 unfav.
This variance consists of fixed expense only.
3. Efficiency Variance- the difference between the
actual hours worked x SFOH Rate and standard hours
allowed x SFOH Rate.
actual hours x SFOH Rate

(3,475 x P20) P 69,500
Standard hours allowed X SFOHR
(3400 x P 20) ( 68,000)
Efficiency Variance P 1,500 Unfav.
Four Variance Method
1. Spending Variance
Actual FOH P 73,840

Actual Hours worked:
Fixed Expenses 32,000
Variable Expense
(3,475 x P 12) 41,700 (73,700)
Spending Variance P 140 unfav.
Computation is the same with that of the spending variance

under the three way method.
2. Variable Efficiency Variance
Budget allowance based on actual hours

[ 32,000 + ( 3,475 x P 12)] P 73,700
Budget allowance based on Std. hours
[ 32,000 + ( 3400 x P 12)] (72,800)
Variable Efficiency Variance P 900 Unfav.

3. Fixed Efficiency Variance
Actual Hours x Fixed OH Rate

(3,475 x P 8) P 27,800
Std. Hours allowed x Fixed
(3,400 x P 8) (27,200)
Fixed Efficiency Variance P 600 unfav.

4. Idle Capacity Variance- is identical with the idle capacity
variance under the three way method.
Normal Capacity Hours x Fixed OH Rate

( 4,000 x P 8) P 32,000
Actual Hours worked x Fixed OH Rate
( 3,475 x P 8) (27,800)
Idle Capacity Variance P 4,200 Unfav.

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FIXED

Factory Overhead per unit:

FIXED OVERHEAD VARIANCES

NOTE: The variances associated with the variable and

Note: Through the preparation of a Flexible

𝑻𝒐𝒕𝒂𝒍 𝑭𝑶𝑯 𝑷𝟖𝟎,𝟎𝟎𝟎

𝑻𝒐𝒕𝒂𝒍 𝑽𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝑭𝑶𝑯 𝑷𝟒𝟖,𝟎𝟎𝟎

𝑻𝒐𝒕𝒂𝒍 𝑭𝒊𝒙𝒆𝒅 𝑭𝑶𝑯 𝑷𝟑𝟐,𝟎𝟎𝟎

Standard hours x Standard Factory

Overall (net) FOH Variance- the difference

Overall FOH Variance:

Actual FOH P 73, 840

This variance is the responsibility of the dept. managers to

Budget Allowance P 72,800

This variance indicates the costs of capacity available but not

Actual FOH P 73,840

Budget Allowance P 73, 700

actual hours x SFOH Rate

Actual FOH P 73,840

Computation is the same with that of the spending variance

Budget allowance based on actual hours

Variable Efficiency Variance P 900 Unfav.

Actual Hours x Fixed OH Rate

Fixed Efficiency Variance P 600 unfav.

Normal Capacity Hours x Fixed OH Rate

Idle Capacity Variance P 4,200 Unfav.

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