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Overall or Net Factory Overhead Variance:

Jobs or processes are charged with with costs on the basis of standard hours allowed multiplied by the standard factory overhead rate. The standard hours allowed figure is determined by multiplying the labor hours required to produce one unit (the standard labor hour per unit) times the actual number of units produced during the period. The units produced are the equivalent units of production for the department factory overhead being analyzed. At the end of each month, overhead actually incurred is compared with the expenses charged into process using the standard factory overhead rate. The difference between these two figures is called overall factory overhead variance or net factory overhead variance.

Example:

From the following data calculate factory overhead overall (net) variance:

Actual overhead $7,384
Actual hours used 3,475 hours
Units produced during the period 850
Standard hours for one unit 4
Standard factory overhead rate $2.00

Solution:

The overall or net factory overhead variance is computed below:

Actual overhead $7,384
Overhead charged to production (3400* standard hours allowed × $2 standard overhead rate) 6,800
 
Overall (or net) overhead variance. $584 unfav.
 
*850 equivalent units produced × 4 standard direct labor hours per unit of production  

This unfavorable overall overhead variance needs further analysis to reveal detailed causes for the variance and to guide management toward remedial action. This analysis may be made by using:

  • The two variance method

  • The three variance method and

  • The four variance method

Relevant Articles:

» Definition and Explanation of Standard Cost
» Purposes and Advantages of Standard Costing System
» Setting Standards
» Materials Price Standard
» Materials Price Variance
» Materials Quantity Standard
» Materials Quantity Variance
» Direct Labor Rate Standard
» Direct Labor Rate Variance
» Direct Labor Efficiency Standard
» Direct Labor Efficiency Variance
» Factory Overhead Cost Standards
» Overall or Net Factory Overhead Variance
» Overhead Controllable Variance
» Overhead Volume Variance
» Overhead Spending Variance
» Overhead Idle Capacity Variance
» Overhead Efficiency Variance
» Variable Overhead Efficiency Variance
»

Fixed Overhead Efficiency Variance

» Mix and Yield Variance
» Variance Analysis Example
» Standard Costing and Variance Analysis Formulas
» Management by Exception and Variance Analysis
» International Uses of Standard Costing System
» Advantages, Disadvantages, and Limitations of Standard Costing




 

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