Controlling your manufacturing expenses starts with identifying your factory overhead costs. These are all the expenses other than the direct materials and direct labor used to produce your merchandise. You track the factory overhead costs as your inventory moves through the production line. The factory overhead cost variance report compares the actual fixed and variable costs against the standard fixed and variable costs. This lets you know whether your actual costs exceed the standard costs after each production run.
Factory Overhead Components
Factory overhead expenses are divided into fixed and variable costs. Factory overhead costs are also known as manufacturing overhead costs and indirect production costs. Fixed factory overhead expenses are long-term costs that do not change no matter how many units are produced. Typical fixed factory overhead costs include rent, depreciation and property taxes. Variable factory overhead costs can change with each production run. Variable factory overhead costs include indirect labor, utilities, supplies and parts.
Actual Overhead Costs
The actual factory overhead costs are the dollars and cents of indirect expenses you incur to manufacture your product. You must calculate the actual total costs and the actual cost per unit and include them on your factory overhead variance report. For example, your total actual variable costs are $5,000, the actual fixed costs are $10,000 and you produce 5,000 units for the period. Divide the $5,000 variable overhead costs by 5,000 units to get the actual variable factory overhead cost of $1 per unit. Divide the $10,000 fixed costs by 5,000 units to get the actual $2 fixed factory overhead cost per unit.
Standard Overhead Costs
Your standard factory overhead costs are budgeted factory overhead amounts. The standard factory overhead costs remain fixed over the long term and serve as a benchmark for measuring your actual overhead cost variances. You calculate your standard per unit cost using your budgeted figures. For example, your budgeted fixed costs are $12,000, budgeted variable costs are $4,000, and the budgeted production is 4,000 units. Your standard fixed factory overhead cost is the $12,000 budgeted cost divided by 4,000 projected units, or $3 per unit. The standard variable factory overhead cost is the $4,000 budgeted cost divided by 4,000 projected units, or $1 per unit.
Variance Report Uses
The factory overhead cost variance report compares the actual and standard fixed and variable factory overhead cost per unit. The standard fixed and variable factory overhead costs per unit are usually listed underneath the actual costs. For example, if the actual factory overhead costs are $3.50 per unit and the standard factory overhead costs are $3.80 per unit, you have a favorable factory overhead cost variance of 30 cents. If the actual factory overhead costs are more than the standard factory overhead costs, you have an unfavorable cost variance. In this case, you want to investigate why your actual costs are more than your standard costs.
- Jupiterimages/Creatas/Getty Images