Fixed Manufacturing Overhead Total Variance


Definition

Fixed Overhead Total Variance is the difference between actual and absorbed fixed production overheads during a period.

Formula

Fixed Overhead Total Variance:

=Actual Fixed OverheadsxAbsorbed Fixed Overheads
Actual Output x FOAR*

* Fixed Overhead Absorption Rate


Example

Motors PLC is a manufacturing company involved in the production of automobiles.

Information from its last budget period is as follows:

Actual Production275,000 units
Budgeted Production250,000 units
Actual Fixed Production Overheads$526,000,000
Budgeted Fixed Production Overheads$500,000,000

Calculate the fixed overhead total variance.


In order to calculate the required variance, we first need to find out the standard absorption rate:

Fixed Overhead Absorption Rate=budgeted fixed overheads
budgeted output
=$50,000,000
250,000 units
=2,000 per unit

Now we can apply the formula to calculate the fixed overhead total variance as follows:

=Actual Fixed Overheads-Absorbed Fixed Overheads
=$526,000,000-275,000 x $2,000
=$526,000,000-$550,000,000
=$24,000,000 Favorable

The variance is favorable because the actual expense is lower than the fixed overheads absorbed during the period.



Explanation

Fixed Overhead Total Variance is the difference between the actual fixed production overheads incurred during a period and the 'flexed' cost (i.e. fixed overheads absorbed).

In case of absorption costing, the fixed overhead total variance comprises the following sub-variances:

Under marginal costing system, fixed production overheads are not absorbed in the cost of output. Fixed overhead total variance in such instance will therefore equal to the fixed overhead expenditure variance because the budgeted and flexed overhead cost shall be the same.



Example

Continuing the Motors PLC example above, we have the following information:

Actual Production275,000 units
Budgeted Production250,000 units
Actual Fixed Production Overheads$526,000,000
Budgeted Fixed Production Overheads$500,000,000

Calculate the fixed overhead volume variance and fixed overhead expenditure variance.


  • Fixed Overhead Expenditure Variance
    Actual Production$526,000,000
    Less: Budgeted Fixed Overheads$500,000,000
    Variance$26,000,000
    Adverse

    The variance is adverse because Motors PLC incurred greater expense than provided for in the budget.


  • Fixed Overhead Volume Variance
    Budgeted Production$500,000,000
    Less: Absorbed Fixed Overheads [above example]$550,000,000
    Variance$50,000,000
    Favorable

    The variance is favorable because Motors PLC yielded a higher output than anticipated in the budget.


  • Proof Check
    The sum of fixed overhead expenditure and volume variances should equal to the fixed overhead total variance as calculated in above Example:
    Fixed Overhead Expenditure Variance$ 26,000,000 Adverse
    Fixed Overhead Volume Variance$ 50,000,000 Favorable
    Total$ 24,000,000Adverse
    Fixed Overhead Total Variance$ 24,000,000Adverse

    The variance is favorable because Motors PLC yielded a higher output than anticipated in the budget.

The following diagram summarizes the breakup of the total variance into its sub-components: