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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 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

## Two Variance Method:

The two variances are the controllable variance and volume variance.

1. Controllable variance is the difference between actual expenses incurred and the budget allowance based on standard hours allowed for work performed. Read more about controllable variance.

2. Volume variance represents the difference between the budget allowance and the standard expenses charged to work in process (Standard hours allowed × Standard overhead rate). Read more about controllable variance.

## Three Variance Method:

The three variances are spending variance, idle capacity variance, and efficiency variance.

1. Spending variance is the difference between actual expenses incurred and the budget allowance based on actual hours worked. Read more about controllable variance.

2. Idle capacity variance is the difference between the budget allowance based on actual hours and actual hours worked multiplied by the standard overhead rate. Read more about controllable variance.

3. Efficiency variance is the difference between actual hours worked multiplied by the standard overhead rate and the standard hours allowed times the standard overhead rate.

## Four Variance Method:

The four variances are spending variance, variable efficiency variance, fixed efficiency variance, and idle capacity variance. The four variance method divides the efficiency variance into its fixed and variable components.

 » 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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