Discuss the following statement: "Since fixed overhead is, by definition, not related to changes in activity level, then the fixed overhead spending variance is zero."
It is true that fixed overhead costs do not vary with output (activity level). Many fixed overhead items, -- long-run investment in property, plant, and equipment, for example -- are not subject to change in the short run. As a rule, fixed overhead costs are beyond the immediate control of management. This means that the fixed overhead spending variance is typically small. However, there can be changes in the cost of fixed overhead items. For example, property taxes can increase during the year. In addition, some fixed overhead items are fixed with respect to output or direct labor hours, but they are not fixed with respect to other drivers. For example, purchasing may vary on the basis of number of purchase orders processed. These changes will result in a fixed overhead spending variance.
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