Fixed Overhead Variances & Sub-variances (Cambridge International A-Level Accounting)

Fixed overhead variances

Spec point — how to calculate the following variances: – fixed overhead expenditure and volume – fixed overhead capacity and efficiency sub-variances

Fixed overhead variances

How to calculate the overhead variances?

• Many of the formulas will use overhead absorption rates (OAR)

• The OAR is calculated based on the budgeted information and not the actual

• The total fixed overhead variance is the difference between the flexed budgeted cost and the actual cost for fixed overheads

• It is split into two variances

  • Fixed overhead expenditure variance

    • The variance due to the difference between the fixed budgeted and actual expenditure or spending

  • Fixed overhead volume variance

    • The variance due to the difference between the flexed budgeted and fixed budgeted overhead costs

Sub-variances of fixed overhead volume variance

• There are two sub-variances for the fixed overhead volume variance

• The sum of these two sub variances will equal the fixed overhead volume variance

  • Fixed overhead capacity variance

    • This compares the variance caused by the difference in budgeted and actual labour hours for the same output

  • Fixed overhead efficiency variance

    • This variance looks at the difference in budgeted hours based on actual output and actual hours

Exam Hint Remember to calculate the OAR using the standard costing information and not the actual information.

The OAR can be based on labour hours, material or units.

What are the possible causes of variances?

• Unexpected changes to machine or labour hours
• Better machines can reduce the OAR per machine hour
• Better skilled labours will need fewer hours to complete the work, therefore reducing the OAR per labour hour

Worked Example Brakes Ltd make brake pads. Here is the annual budgeted and actual information:

	Budgeted	Actual
Production (units)	10 000	12 000
Fixed overheads ($)	150 000	160 000
Direct labour hours per unit	30 minutes	45 minutes

Calculate:

(i) fixed overhead expenditure variance

(ii) fixed overhead volume variance

(iii) total fixed overhead variance

(iv) fixed overhead capacity sub-variance

(v) fixed overhead efficiency sub-variance

Answer:

(i) Fixed Overhead Expenditure Variance

Use the formula

• standard fixed overheads based on fixed budget - actual fixed overheads
• It is adverse as the overall actual cost is more than the budgeted cost

$150 000 - $160 000

Final answer: $10 000 Adverse

(ii) Fixed Overhead Volume Variance

Calculate the OAR per labour hour based on standard costing

\begin{gathered} \frac{Budgeted overheads}{Total \text{labour} hours} \\ = \frac{\ 150 000}{( 10 000 \times 0.5 ) hours} \ = \frac{$ 150 000}{5 000 hours} \ = $ 30 \text{per} \text{labour} \text{hour} \end{gathered}$

Use the formula

• standard OAR × (standard hours based on actual output - standard hours based on fixed output)
• It is favourable as the actual hours is more

standard hours based on actual output = 12 000 × 0.5 hours = 6 000 hours

standard hours based on fixed output = 10 000 × 0.5 hours = 5 000 hours

$30 × (6 000 - 5 000)

Final answer: $30 000 Favourable

(iii) Total Fixed Overhead Variance

Combine the variances

Fixed overhead expenditure variance	$10 000 ADV
Fixed overhead volume variance	$30 000 FAV
Total fixed overhead variance	$20 000 FAV

Alternatively, you can use the formula

• standard fixed overheads based on flexed budget - actual fixed overheads

\text{standard} \text{cost} \text{per} \text{unit} = \frac{\ 150 000}{10 000} = $ 15$

(12 000 × $15) - ($160 000)

Final answer: $20 000 Favourable

(iv) Fixed Overhead Capacity Sub-variance

Find the actual hours

12 000 × 45 minutes = 9 000 hours

Use the formula

• standard OAR × (actual hours - standard hours)
• It is favourable because the actual hours used are more than expected

$30 × (9 000 - 5 000)

Final answer: $120 000 Favourable

(v) Fixed Overhead Efficiency Sub-variance

Use the formula

• standard OAR × (standard hours based on actual output - actual hours)
• It is adverse as the actual hours are more than the budgeted hours for the same level of output

$30 × (6 000 - 9 000)

Final answer: $90 000 Adverse

Point to note that the difference between the capacity and efficiency variances equal to the volume variance

Fixed overhead capacity variance	$120 000 FAV
Fixed overhead efficiency variance	$90 000 ADV
Fixed overhead volume variance	$30 000 FAV