What is Fixed Overhead Volume Variance?

Explanation

Companies arrive at a figure of budgeted fixed overheads based on their expected production level. Based on budgeted fixed overheads, an absorption rate is calculated for applying the same to the actual production. Recovery of fixed overheads can be made by including the same cost per unit. The absorption rate per unit is calculated by dividing the budgeted fixed overheads by the budgeted production units. The same is termed as “Standard Fixed Overhead Rate.”

The actual product might be different, and therefore, it leads to a difference in the total fixed overheads absorbed or applied to the actual production and the budgeted fixed overheads. Thus, the variance is created due to variance in the actual production against the budgeted production.

Formula

It can be calculated using the following formula:

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

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Here,

  • Applied Fixed Overheads = Standard Fixed Overheads × Actual ProductionStandard Fixed Overheads = Budgeted Fixed Overheads ÷ Budgeted Production

The formula suggests that the difference between budgeted fixed overheads and applied fixed overheads reflects fixed overhead volume variance. Also, there can be other bases for allocating fixed overheads apart from production units. These allocation bases can include direct labor hours, machine hours, etc. The standard fixed overhead and the applied fixed overheads will be calculated based on an allocation base.

Examples

Fixed overhead volume varianceVolume VarianceVolume Variance is an assessment tool that checks if there is a difference in actual quantity consumed or sold and its budgeted quantities. It is usually expressed in monetary terms by multiplying the difference between the two with the standard price per unit.read more is calculated as follows:

Interpretation

It can either be positive or negative. When the same is positive, it reflects favorable variance, and when the variance is negative, it reflects unfavorable variance.

Unfavorable Variance

In the example that we took, the variance was a negative figure, i.e. ($10,000). This means that the budgeted fixed overheads exceeded the applied fixed overheads. This reflects that the production has been less than the budgeted production, suggesting that the company is underutilizing its production facilities. This gives rise to unfavorable variance.

Favorable Variance

Fixed overhead volume variance is positive when the applied fixed overheads exceed budgeted fixed overheads. This indicates that the company has over-utilized its production facilities by producing many units with the available resources. This represents a favorable condition for the company.

Causes

There can be various causes, which are as follows:

Advantages

  • It helps to determine the company’s efficiency in respect of production capacity.It is an important variance as it helps the management balance the books in the operating statement prepared as a part of absorption costingAbsorption CostingAbsorption costing is one of approach which is used for the purpose of valuation of inventory or calculation of the cost of the product in the company where all the expenses incurred by the company are taken into the consideration i.e., it includes all the direct and indirect expenses incurred by the company during the specific period.read more.

Disadvantages

  • The variance doesn’t give much useful information provided by other variances calculated under cost accountingCost AccountingCost accounting is a defined stream of managerial accounting used for ascertaining the overall cost of production. It measures, records and analyzes both fixed and variable costs for this purpose.read more.Calculating other variances is beneficial in many cases, such as when labor hours are used as an allocation base. In this case, calculating labor variance will give better results.

This has been a guide to what is Fixed Overhead Volume Variance. Here we discuss formulas, examples, interpretations, causes, and advantages and disadvantages. You may learn more about financing from the following articles –

  • Production Volume VarianceApplied OverheadVariance Analysis FormulaVariance Analysis