Fixed overhead volume variance

The fixed overhead volume variance is the difference between budgeted fixed manufacturing overhead and fixed manufacturing overhead applied to work in process during the period.

Formula

The formula of fixed overhead volume variance is given below:

Fixed overhead volume variance = Budgeted fixed overhead – Fixed overhead applied

or

Fixed overhead volume variance = Fixed component of predetermined overhead rate × (Budgeted hours – Standard hours allowed for actual production)

Example

Mexico Company provides you the following data:

• Budgeted production: 50,000 units
• Standard hours allowed per unit: 4 hours
• Budgeted hours: 200,000 hours ( = 50,000 units × 4 hours)
• Actual production: 40,000 units
• Budgeted variable manufacturing overhead: $150,000
• Budgeted fixed manufacturing overhead $600,000

Required: Compute fixed overhead volume variance using above data.

Solution

Fixed overhead volume variance = Budgeted fixed overhead – Fixed overhead applied to work in process
= $600,000 – $480,000*
= $120,000 Unfavorable

*In standard costing system, the overhead is applied to work in process by multiplying predetermined overhead rate by the standard hours allowed for actual output. In this example we are concerned only with the fixed component of predetermined overhead rate that is computed as follows:

Fixed component of predetermined overhead rate = Budgeted fixed overhead/budgeted hours
= $600,000/200,000 hours
= $3 per hour

Fixed overhead applied = Fixed component of predetermined overhead rate × Standard hours allowed for actual output
= $3 × (Actual output × Standard hours per unit)
= $3 × (40,000 units × 4 hours per unit)
= $3 × 160,000 hours
= $480,000

Now we compute this variance using the second formula:

Fixed overhead volume variance = Fixed component of predetermined overhead rate × (Budgeted hours – Standard hours allowed for the actual production)
= $3 × (200,000 hours – 160,000 hours)
= $3 × 40,000 hours
= $120,000 Unfavorable

Fixed overhead volume variance indicates efficiency or inefficiency of management in utilizing the production facilities. In the above example, the overhead volume variance of $120,000 is unfavorable because the standard hours allowed for actual production are less than the budgeted hours which means a less efficient use of production facilities.

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