Fixed Overhead Volume Variance

Fixed overhead volume variance is the difference between fixed overhead applied to production for 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 the budgeted production. In this way, it measures whether or not the fixed production resources have been efficiently utilized.

While fixed overheads are supposed to be fixed, to facilitate timely reporting, the budgeted fixed overhead cost needs to be applied to units produced at a standard rate. Because this standard application rate is based on estimated production level, an increased or reduced actual production will respectively result in a higher or lower total fixed overhead applied to production and thus it will differ from the total budgeted figure. This difference is the fixed overhead volume variance.

Fixed overhead volume variance is one of the two components of total fixed overhead variance, the other being fixed overhead budget variance. The fixed overhead volume variance itself may be sub-classified into:

  • FOH volume capacity variance
  • FOH volume efficiency variance

Formulas

Fixed overhead volume variance is calculated as follows:

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

Applied Fixed Overhead
= Overhead Application Rate × Standard Input Qty. Allowed for Actual Production

Whereas, the input quantity is a suitable basis used to apply fixed overheads to production. It may be a measure such as labor hours, units of utilities consumed, machine hours used, units produced, etc. This is also called an overhead application basis.

Overhead application rate is the standard fixed overhead cost per unit of input quantity and it is calculated using the following formula:

Standard Fixed Overhead Rate
=Budgeted Fixed Overhead
Budgeted Units

Analysis

Fixed overhead volume variance is favorable when the applied fixed overhead cost exceeds the budgeted amount. This is because the units produced in such a 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 represent cost saved because units were essentially produced at no additional fixed overhead. The result is a lower actual unit cost and higher profitability than the 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 of the fixed production capacity.

When calculated using the formula above, a positive fixed overhead volume variance is favorable.

Example

Calculate the fixed overhead volume variance using the following figures:

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

Solution

FOH 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

by Irfanullah Jan, ACCA and last modified on

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