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:
Calculation: total actual overheads - total budgeted overheads
Interpretation: calculates the portion of fixed production overheads variance driven by the changed amount of overheads
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:
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.
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).
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: