There are two types of overhead cost variances:

  1. Fixed overhead variance
  2. Variable overhead variance

1. Fixed Overhead Variance

This is a cost that is not directly related to output; it is a general time-related cost.

Specifically, fixed overhead variance is defined as the difference between standard cost and fixed overhead allowed for the actual output achieved and the actual fixed overhead cost incurred.

Formula to Calculate Fixed Overhead Variance

To calculate fixed overhead variance (FOV), apply the following formula:

FOV = Actual output x Standard fixed overhead rate – Actual fixed overheads

The following are the other variances:

(i) Expenditure Variance

This shows the over/under absorption of fixed overheads during a particular period. When the actual output exceeds the standard output, it is known as over-recovery of fixed overheads.

Expenditure variance (EV) is expressed as follows:

EV = (Standard overhead – Actual overhead)

(ii) Volume Variance

It is favorable if the actual output is less than the standard output, and vice-versa. This is due to the nature of fixed overheads, which are not expected to change with the change in output. This variance can be expressed as:
Volume variance = (Actual output x Standard rate) – Budgeted fixed overheads
Volume variance can further be divided into three variances, which are:

  • (a) Capacity Variance
  • (b) Calendar Variance
  • (c) Efficiency Variance

(a) Capacity Variance
This is a portion of volume variance that arises due to high or low working capacity. It is influenced by idle time, machine breakdown, power failure, strikes or lockouts, or shortages of materials and labor. Thus, standard rate (Revised budgeted units – budgeted hours).

(b) Calendar variance
This variance arises due to the difference in the number of working days when the actual number of working days is greater than standard working days. It is regarded as a favorable type of variance. It is expressed in the following way:
Calendar variance = No. of working days more or less x Standard (St.) rate per unit

(c) Efficiency Variance
This is the portion of volume variance that is due to the difference between the budgeted output efficiency and the actual efficiency achieved. This is due to labor working efficiency. Thus, it can be expressed as:

Efficiency variance = St. rate (Actual production — St. production ) in units

2. Variable Overhead Variance

Variable overhead variances rise or fall in proportion to output. Therefore, these variances reflect the difference between the standard cost of overheads allowed for the actual output achieved and the actual overhead cost incurred.

This type of variance is calculated separately for direct variable expenses and overhead variable expenses. The per-unit cost does not change due to the change in the quantity of output. The price variance can be held responsible for the variable overhead variance.

It can be calculated as follows:

Variable overhead cost variance = (St. Cost – Actual cost)

Therefore,

Standard cost = Actual output x St. rate of variable overhead cost

Example

This example covers fixed overhead variances.

Using the information given below, compute the fixed overhead cost, expenditure, and volume variances.

  • Normal capacity = 5,000 hours
  • Budgeted fixed overhead rate = $10 per standard hour
  • Actual level of capacity utilized = 4,400 standard hours
  • Actual fixed overhead = $52,000

Solution

1. Fixed Overhead Cost Variance
= Absorbed overhead – Actual overhead
= (4,400 hrs. x $10) – 52,000
= $8,000 (A)
2. Expenditure Variance
= Budgeted overhead – Actual overhead
= (5,000 hrs. x $10) – 52,000
= $2,000 (A)
3. Volume Variance
= Absorbed overhead – Budgeted overhead
= (4,400 hrs. x $10) – (5,000 hrs. x $10)
= 44,000 – 50,000
= $6,000 (A)
Working
Overhead cost variance = Expenditure variance + Volume variance
8,000 (A) = 2,000 (A) + 6,000 (A)

Problem 1

In department A of a plant, the following data are submitted for the week ending 31 March 2019:

  • Standard output for 40 hours per week = 1,400 units
  • Budgeted fixed overhead = $1,400
  • Actual output = 1,200 units
  • Actual hours worked = 32 hours
  • Actual fixed overhead = $1,500

Required: Prepare a statement of variances.

Solution

Basic Calculations
(i) Standard (St.) overhead rate per unit = Bugdeted fixed overhead / Budgeted output
= $1,400 / 1,400 units = $1
(ii) St. quantity per hour = 1,400 units / 40 hrs. = 35 units
(iii) St. quantity for actual hours = (1,400 units x 32 hrs.) / 40 hrs.
= 1,120 units
(iv) Recovered overhead = 1,200 units x $1 = $1,200
(v) Standard overhead = 1,120 units @ $1 = $1,120

Calculations of Variances
1. Fixed Overhead Cost Variance
= Recovered overhead – Actual overhead
= 1,200 – 1,500 = $300 (A)
2. Expenditure Variance
= Budgeted overhead – Actual overhead
= 1,400 – 1,500 = $100 (A)
3. Volume Variance
= Recovered overhead – Budgeted overhead
= 1,200 – 1,400 = $200 (A)
Volume variance is further sub-divided into efficiency variance and capacity variance.
4. Efficiency Variance
= Recovered overhead – Standard overhead
= 1,200 – 1,120 = $80 (F)
5. Capacity variance
= Standard overhead – Budgeted overhead
= 1,120 – 1,400 = $280 (A)

Problem 2

The following information was obtained from the record of a manufacturing unit using the standard costing system:

Standard Actual
Production 4,000 units 3,800 units
Working Days 20 21
Fixed Overhead $40,000 $39,000
Variable Overhead $12,000 12,000

Required
You are required to calculate the following overhead variances:
(a) Variable overhead variance
(b) Fixed overhead

  • Expenditure variance
  • Volume variance
  • Efficiency variance
  • Calendar variance

(c) In addition, prepare a reconciliation statement for the standard fixed expenses worked out at a standard fixed overhead rate and actual fixed overhead.

Solution

V.O. St. rate per unit = $12,000 / 4,000 units = $3
F.O. St. rate per unit = $40,000 / 4,000 units = $10
St. production per day = 4,000 units / 20 days = 200 units
F.O. St. rate per day = 200 units x $10 = $2,000
Recovered variable overhead = 3,800 x 3 = $11,400
Recovered fixed overhead = 3,800 x 10 = $38,000
St. fixed overhead = 200 units x 21 days x $10 = $42,000

Calculation of Variances
(a) Variable overhead variance
= (Recovered overhead – Actual overhead)
= 11,400 – 12,000 = $600 (A)
(b) Fixed overhead variance
= (Recovered overhead – Actual overhead)
= 38,000 – 39,000 = $1,000 (A)
(i) Expenditure variance
= Budgeted overhead – Actual overhead
= 40,000 – 39,000 = $1000 (F)
(ii) Volume variance
= Recoved overhead – Budgeted overhead
= 38,000 – 40,000 = $2,000 (A)
(iii) Efficiency variance
= Recovered overhead – Standard overhead
= 38,000 – 42,000 = $4,000
(iv) Calendar variance
= (Actual days – Budgeted days) x SR per day
= (21 – 20) x 2,000 = $2,000 (F)

Reconciliation Statement

Recovered Fixed Overhead $38,000
Less Fixed Overhead Exp. Variance 1,000 (F)
Less Fixed Overhead Calendar Variance 2,000 (F) 3,000 (F)
35,000
Add Fixed Overhead Efficiency Variance 4,000 (A)
Actual Fixed Overhead 39,000

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