# Fixed Manufacturing Overhead Total Variance

## Definition

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

## Formula

 = Actual Fixed Overheads x Absorbed Fixed Overheads Actual Output x FOAR*

## 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 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 Production 275,000 units Budgeted Production 250,000 units Actual Fixed Production Overheads \$526,000,000 Budgeted Fixed Production Overheads \$500,000,000

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 \$50,000,000Favorable

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 \$ 24,000,000 Adverse Fixed Overhead Total Variance \$ 24,000,000 Adverse

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: 