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. 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: 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) 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 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 This example covers fixed overhead variances. Using the information given below, compute the fixed overhead cost, expenditure, and volume variances. 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) In department A of a plant, the following data are submitted for the week ending 31 March 2024: Required: Prepare a statement of variances. Basic Calculations (i) Standard (St.) overhead rate per unit = Budgeted 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) The following information was obtained from the record of a manufacturing unit using the standard costing system: Required You are required to calculate the following overhead variances: (a) Variable overhead variance (b) Fixed overhead (c) In addition, prepare a reconciliation statement for the standard fixed expenses worked out at a standard fixed overhead rate and actual fixed overhead. 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)
1. Fixed Overhead Variance
Formula to Calculate Fixed Overhead Variance
(i) Expenditure Variance
(ii) Volume Variance
2. Variable Overhead Variance
Example
Solution
Problem 1
Solution
Problem 2
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
Solution
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
How to Compute Various Overhead Cost Variances FAQs
There are two types of overhead cost variances: fixed overhead variance and variable 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.
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.
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.
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 Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, 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 or view his author profiles on Amazon, Nasdaq and Forbes.
