Fixed Overhead Volume Variance

Fixed overhead volume variance is the difference between fixed overhead applied to good units produced during a given accounting period and the total fixed overheads budgeted for the period. Fixed overhead volume variance occurs when the actual production volume differs from budgeted production. In this way it measures whether or not the fixed production resources have been efficiently utilized.

Fixed overhead volume variance is favorable when the applied fixed overhead exceeds the budgeted amount. This is because the units produced in such case are more than the quantity expected from current production capacity and this reflects efficient use of fixed resources. The standard fixed overhead applied to units exceeding the budgeted quantity is saved in the form of over-applied overhead. The result is lower actual unit costs and higher profitability than budgeted figures. An unfavorable fixed overhead volume variance occurs when the fixed overhead applied to good units produced falls short of the total budged fixed overhead for the period. This is because of inefficient use the fixed production capacity.

Fixed overheads may be applied to production using a predetermined overhead rate calculated by dividing estimated total fixed costs during the period by the budget units of a cost basis such as units produced, total machine hours etc.

Fixed overhead volume variance is one of the two components of total fixed overhead variance, the other being fixed overhead budget variance. There are two sub-components of fixed overhead volume variance:

  • FOH volume capacity variance
  • FOH volume efficiency variance

Formulas

Here we will assume, number of units as the basis for applying fixed costs to production. The formula to calculate various different bases two of the most common being the number of units and machine hours.

Fixed Overhead Volume Variance = Applied Fixed Overhead – Budgeted Fixed Overhead

As per above formulas, a positive value of fixed overhead volume variance is favorable whereas a negative value is unfavorable. The figures required in the above formula can be calculated as follows:

Applied Fixed Overhead = Standard Fixed Overhead Rate × Standard Hours Allowed

Standard Fixed Overhead Rate =Budgeted Fixed Overhead
Budgeted Units

Alternatively, fixed overhead volume variance may be calculated using the following formula:

Fixed Overhead Volume Variance = (Actual Activity – Normal Activity) × Fixed Overhead Application Rate

Example

Calculate fixed overhead volume variance using the following data:

Budgeted Fixed Overheads$50,000
Budgeted Units10,000
Actual Units Produced10,700

Solution

Fixed Overhead Application Rate =$50,000= $5 per unit
10,000

Applied Fixed Overhead = 10,700 × $5 = $53,500

Fixed Overhead Volume Variance = $53,500 – $50,000 = $3,500 Favorable

Written by Irfanullah Jan