## Definition

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

## Formula

=

x

=

x

Actual Output x 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 Production

275,000 units

Budgeted Production

250,000 units

\$526,000,000

\$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:

=

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:

=

\$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 Production

275,000 units

Budgeted Production

250,000 units

\$526,000,000

\$500,000,000

Actual Production

\$526,000,000

\$500,000,000

Variance

\$26,000,000

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

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:

\$ 26,000,000

\$ 50,000,000

Favorable

Total

\$ 24,000,000

Favorable

\$ 24,000,000

Favorable

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: