Fixed production overheads variance

Last updated: 21.03.2016

In absorption costing, the total variance in fixed production overheads is equal to the amount of unabsorbed overheads, i.e.  

total actual overheads – overheads absorbed to products = total actual overheads – (budgeted overheads per unit of production quantity * actual production quantity)

 

It can be split into:

  • Fixed production overheads expenditure variance 

Calculation:  total actual overheads - total budgeted overheads

Interpretation:  calculates the portion of fixed production overheads variance driven by the changed amount of overheads

 

  • Fixed production overheads quantity (volume) variance 

Calculation:  (budgeted production quantity - actual production quantity) * total budgeted overheads per budgeted number of units

Interpretation:  calculates the portion of fixed production overheads variance driven by the changed production volume. If the actual production quantity is higher than budgeted, this variance will be favorable and vice versa.

 

Fixed production overheads quantity variance can be further split into:

 

  • Fixed production overheads efficiency variance 

Calculation:  (actual labor hours for the actual production quantity - budgeted labor hours that would be needed for the actual production quantity) * budgeted labor hour rate

Interpretation:  calculates the portion of fixed production overheads volume variance driven by the changes in labor efficiency. If total actual labor hours are lower than budgeted labor hours necessary to produce actual quantity, the variance is favorable, because the staff worked more efficiently and vice versa.

 

  • Fixed production overheads capacity variance 

Calculation:  (budgeted total labor hours - actual total labor hours) * budgeted labor hour rate

Interpretation:  calculates the portion of fixed production overheads volume variance driven by the changes of the number of hours worked. If total actual labor hours are higher than budgeted, the variance is favorable, because the staff worked extra hours (e.g. overtimes) and vice versa (e.g. breakdowns).

 

Example

Budget: 10 labor hours per €10/hour are necessary to produce a unit; produced output is 1 000 units

Actual: 8 labor hours per €12/hour are necessary to produce a unit; produced output is 1 100 units and total fixed production overheads 120 000

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Total fixed production overheads variance = unabsorbed overheads = 120 000 – (10 * 10 * 1 100) = 120 000 - 110 000 = 10 000 (under-absorbed overheads) split into:

Fixed production overheads expenditure variance = 120 000 – (10 * 10 * 1 000) = 120 000 – 100 000 = 20 000 (unfavorable)

Fixed production overheads quantity (volume) variance = (1 000 – 1 100) * (10 * 10) = - 10 000 (favorable) split into:

  • Fixed production overheads volume efficiency variance = (8 * 1 100 – 10 * 1 100) * 10 =     (8 800 – 11 000) * 10 = - 22 000 (favorable as less labor hours are necessary in actuals to achieve the actual production volume)
  • Fixed production overheads volume capacity variance = (10 * 1 000 – 8 * 1 100) * 10 = (10 000 – 8 800) * 10 = 12 000 (unfavorable as total actual labor hours are lower than budgeted)


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