A LevelAccountingCambridge (CIE)Revision NotesCost & Management AccountingStandard CostingFixed Overhead Variances & Sub-variances

Fixed Overhead Variances & Sub-variances (Cambridge (CIE) A Level Accounting): Revision Note

Exam code: 9706

Tasiref Hussain

Written by: Tasiref Hussain

Reviewed by: Dan Finlay

Updated on

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

Total fixed overhead variance

What is the formula?

standard fixed overheads based on flexed budget - actual fixed overheads

What are the steps?

  • Multiply the budgeted overhead per unit with the actual output

  • Find the actual overheads incurred

  • Find the difference between the two costs

When is it favourable?

The actual overhead cost is less than the standard overhead cost

Fixed overhead expenditure variance

What is the formula?

standard fixed overheads based on fixed budget - actual fixed overheads

What are the steps?

  • Find the fixed budgeted cost for overhead

  • Find the actual overhead cost

When is it favourable?

The actual overhead cost is less than the standard overhead cost

Fixed overhead volume variance

What is the formula?

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

If OAR is based on labour hours:

standard OAR × (standard hours based on actual output - standard hours based on fixed output)

If OAR is based on units:

standard OAR × (actual units - fixed units)

What are the steps?

  • Calculate the OAR by using the formula below

    • Divide the budgeted overheads by the budgeted labour hours or units

  • Calculate the standard hours or units based on flexed output

  • Calculate the standard hours or units based on fixed output

  • Find the difference between these values

  • The difference is then multiplied by the standard OAR

When is it favourable?

When the standard overheads based on the actual output is more than the standard overheads based on the budgeted output

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

Fixed overhead capacity variance

What is the formula?

standard OAR × (actual hours - standard hours)

What are the steps?

  • Calculate the OAR by using the formula below

    • Divide the budgeted overheads by the budgeted labour hours

  • Calculate the standard hours based on budgeted units

  • Calculate the actual hours based on actual units

  • Find the difference of budgeted and actual hours

  • Multiply the difference with the standard OAR

When is it favourable?

The actual hours are more than the budgeted hours

Fixed overhead efficiency variance

What is the formula?

standard OAR × (standard hours based on actual output - actual hours)

What are the steps?

  • Calculate the OAR by using the formula below

    • Divide the budgeted overheads by the budgeted labour hours

  • Calculate the standard hours based on actual output

  • Calculate the actual hours based on actual units

  • Find the difference of budgeted and actual hours

  • Multiply the difference with the standard OAR

When is it favourable?

The actual hours used are less than the standard hours based on the same level of actual output

Examiner Tips and Tricks

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.

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

$10 000 Adverse

(ii) Fixed Overhead Volume Variance

Calculate the OAR per labour hour based on standard costing

table row blank blank cell fraction numerator Budgeted space overheads over denominator Total space labour space hours end fraction end cell row blank equals cell fraction numerator $ 150 space 000 over denominator open parentheses 10 space 000 cross times 0.5 close parentheses space hours end fraction space end cell row blank equals cell fraction numerator $ 150 space 000 over denominator 5 space 000 space hours end fraction space end cell row blank equals cell space $ 30 space per space labour space hour end cell end table

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)

$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

standard space cost space per space unit space equals space fraction numerator $ 150 space 000 over denominator 10 space 000 end fraction space equals space $ 15

(12 000 × $15) - ($160 000)

$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)

$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)

$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

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Author
Reviewer
Tasiref Hussain

Author: Tasiref Hussain

Expertise: Accounting Content Creator

An accomplished Accounting educator with 17 years’ experience, Tasiref combines deep subject expertise with a Master’s in Education and Leadership. A specialist in A-Level, IGCSE, and AAT (Level 4), he brings a unique "examiner’s perspective" from over a decade of marking for major boards. Tasiref uses a structured, knowledge-driven approach and high-impact materials to help students master technical processes and excel in exams.

Dan Finlay

Reviewer: Dan Finlay

Expertise: Maths Subject Lead

Dan graduated from the University of Oxford with a First class degree in mathematics. As well as teaching maths for over 8 years, Dan has marked a range of exams for Edexcel, tutored students and taught A Level Accounting. Dan has a keen interest in statistics and probability and their real-life applications.