There are two types of overhead cost variances:

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:

### (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

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

= (4,400 hrs. x \$10) – 52,000
= \$8,000 (A)
2. Expenditure Variance
= (5,000 hrs. x \$10) – 52,000
= \$2,000 (A)
3. Volume Variance
= (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
= 1,200 – 1,500 = \$300 (A)
2. Expenditure Variance
= 1,400 – 1,500 = \$100 (A)
3. Volume Variance
= 1,200 – 1,400 = \$200 (A)
Volume variance is further sub-divided into efficiency variance and capacity variance.
4. Efficiency Variance
= 1,200 – 1,120 = \$80 (F)
5. Capacity variance
= 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:

• 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
= 11,400 – 12,000 = \$600 (A)
= 38,000 – 39,000 = \$1,000 (A)
(i) Expenditure variance
= 40,000 – 39,000 = \$1000 (F)
(ii) Volume variance
= 38,000 – 40,000 = \$2,000 (A)
(iii) Efficiency variance
= 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)

### What is 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.

### What is 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.

### What is a 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.

### What is an overhead cost variance?

An overhead cost variance is the difference between how much overhead was applied to the production process and how much actual overhead costs were incurred during the period.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.