Cost Accounting

Fixed Overhead Variances in Cost Accounting

Fixed overhead variance refers to the difference between the actual fixed production overheads and the absorbed fixed production overheads over a period of time.

The variance can either be caused by a difference in the fixed overheads at a given level of activity or because of a difference in the number of units produced (which affects the absorption of the overheads).

Because two different factors are affecting the total sales variance, they must be divided into the following 2 types (and the volume variance is also further subdivided as it is affected by 2 different factors):

Fixed Overhead Expenditure Variance

Fixed overhead expenditure variance is a measure used in cost accounting to calculate the difference between the actual and budgeted costs of fixed overhead expenses.
Fixed overhead costs refer to expenses that remain relatively constant regardless of changes in production volume or sales, such as rent, salaries, insurance, and depreciation. These costs are budgeted based on estimates and assumptions made at the beginning of a period.

The fixed overhead expenditure variance helps managers understand why there are differences between what was planned during the budgeting process and what was actually incurred during the period.

Formula to calculate Fixed Overhead Expenditure Variance is
= Actual Overheads – Budgeted Overheads

Fixed Overhead Volume Variance

The fixed overhead volume variance is the difference between the budgeted fixed overhead and applied overheads. The volume variance measures the effect of the actual output departing from the output used at the beginning of the period to compute the predetermined standard fixed overhead rate.
The formula to calculate Fixed Overhead Volume Variance
= Standard Overhead Absorption Rate (OAR) x (Actual number of units – Budgeted number of units)

Fixed Overhead Efficiency Variance

This is the difference between the actual number of hours taken and the standard number of hours taken by the labour to produce the actual number of units.
Formula = Actual no. of labour hours – Standard Number of Labour Hours

Fixed Overhead Capacity Variance

This is the difference between the actual number of hours worked and the standard number of hours worked by labour valued at the standard overhead absorption rate.
Formula to Calculate Fixed Overhead Capacity Variance = Standard Fixed Overhead Rate x (Actual Capacity Hours – Budgeted Capacity Hours)

Also read: What is Economic Order Quantity and Its Assumptions?

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