A.

Four-Variance Method

Under this method, the spending variance is split into two variances, namely [1] variable
spending and [2] fixed spending. Retaining the [3] variable efficiency variance and [4] volume
variance, it forms the 4 way overhead variance analysis. Variable spending variance is the difference
between actual and budgeted variable overhead costs at actual activity level. Fixed spending
variance is the difference between actual and budgeted fixed overhead. The other two variances
were discussed earlier.

FIXED SPENDING (BUDGET) VARIANCE

Actual Fixed OH P72,000
Budgeted Fixed OH 60,000 P12,000 UF
VARIABLE SPENDING (RATE) VARIANCE
Actual Variable OH P168,000
BAAH – variable (P20 x 7,000) 140,000 28,000 UF
VARIABLE EFFICIENCY
VARIANCE
BAAH P200,000
BASH 210,000 10,000 F
VOLUME VARIANCE
BASH P210,000
Standard FOH (SOR x SH) 225,000 15,000 F
TOTAL OVERHEAD VARIANCE P15,000 UF
 The overall unfavorable controllable variance is analyzed deeper in this method by going to
the details of the unfavorable spending variance. We can see that the firm spent more than what is
allowed or expected in the actual activity level, both in variable and overhead costs. The concept
of variable efficiency and volume (capacity) variance is retained.

FIXED BUDGET APPROACH

A fixed budget is a plan based on only one level of activity. The overhead rate is determined
by dividing the total budgeted factory overhead by the planned level of activity regardless of
composition of total overhead cost. Since the behavior of overhead costs is not considered in
determining such overhead rate, a budget for a different level of activity could not be prepared.

For example, the budgeted total overhead costs of Saplot Company is P180,000 at planned
activity level of 6,000 direct labor hours. Thus, the standard overhead rate is P30 per direct labor hour.
Regardless of actual activity level, the company will apply the P30 overhead rate to determine the
standard overhead costs to be incurred that will be used in variance analysis. This differs in flexible
budgeting where only the variable overhead rate is applied to actual activity level and the fixed costs
is not affected.

When factory overhead variance is analyzed on a fixed budget, the budgeted factory
overhead is used regardless of the capacity attained. The analysis may use the [a] two variance
method, or [b] the three variance method.

A. The Two Variance Method

Under this method, the total overhead variance is broken down into budget variance and
volume variance. Budget variance is the difference between the actual factory overhead and the
budgeted overhead at normal capacity. Volume variance is the difference between budgeted
overhead and the standard cost applied to production. To illustrate, consider the data for Saplot
Company and assume that the budgeted capacity is at practical capacity:
BUDGET VARIANCE
Actual Factory Overhead (AFOH) P240,000
Budgeted Factory Overhead (BFOH) 180,000 P60,000 UF
VOLUME VARIANCE
Budgeted Factory Overhead (BFOH) P180,000
Standard Factory Overhead (SOR x 225,000 (45,000) F
SH)
TOTAL OVERHEAD VARIANCE P15,000 UF

The budget variance is unfavorable since the firm spent more than what is budgeted
(expected). The concept of volume variance under the flexible budgeting is retained.

B. The Three-Variance Method

Under this method, the volume variance is broken down into capacity variance and efficiency
variance. Retaining the budget variance, it forms the 3 variance analysis. Capacity variance
indicates whether or not the planed level of activity was attained.It is computed by multiplying the
standard overhead rate by the difference between budgeted hours and actual hours. Efficiency
variance indicates how fast a company can produce its output. It is computed by
multiplying the standard overhead rate with the difference between
actual hours and standard hours
based on actual production.