Standard Costing- Fixed Overhead Variances

The analysis of the material, labour & variable overhead variances is easy as these are direct costs & these variances vary with the production, whereas analysis of the fixed overhead variances is somewhat difficult as not only there is a relation between fixed cost & time but also with capacity & fixed costs do not vary with production.

Fixed Overhead Cost Variance:

The difference between the standard fixed overhead for actual output (i.e., fixed overhead that has been recovered) & the actual fixed overhead which has been incurred, is known as fixed overhead cost variance.

 The formula is:
                        Fixed overhead recovered – Actual fixed overhead

The division of fixed overhead cost variance can be made into fixed overhead expenditure variance & fixed overhead volume variance.

Fixed Overhead Expenditure Variance:

 The distinction between the fixed overhead which has been actually incurred & the fixed overhead which has been originally budgeted is known as fixed overhead expenditure variance.
The formula is:
            Actual fixed overhead – Budgeted fixed overhead

Whereas, Budgeted overhead =
            Budgeted hours * Standard rate per hour
     Or, Budgeted output * Standard rate per unit       

Note: The terms ‘budgeted overhead’ & ‘standard overhead’ cannot be used in the same sense. For budgeted time or output, the budgeted overhead is used & for actual time or for standard output of actual time, standard output is used.

Fixed Overhead Volume Variance:

 The amount of any under- or over-recovery of overheads which arises because of difference between the actual output & the budgeted is measured by the fixed overhead volume variance.

The formula is:
                        (Budgeted hours – Standard hours of actual output) * Standard fixed
                                                                                                overhead rate per hour
                 Or, (Budgeted output – Actual output) * Standard fixed overhead rate per unit
                Or, Budgeted fixed overhead – Fixed overhead recovered

Reasons of occurrence of Volume Variance are:

1. There is a decrease in the consumer demand.
2. Plant capacity is in excess.
3. Due to poor scheduling or input bottlenecks, there is a stoppage of plant.
4. Allowances have not been made as a result of fluctuations of calendar.      

Analysis of fixed overhead volume variance can be done into fixed overhead capacity variance & fixed overhead efficiency variance. Due to the following two factors, the difference between the actual production & the expected production (the volume) arises:
(a) a change in the time worked (capacity) & a change in the efficiency with which the use of time is done.

Fixed Overhead Capacity Variance:

Under- or over-recovery of overhead arises as a result of a change in capacity, other things being equal; because, an equivalent overhead recovery or non-recovery will be there for every hour difference. Therefore, the difference between the budgeted & actual hour which is multiplied by overhead rate per hour is known as the fixed overhead capacity variance.

The formula is:
                  Standard fixed overhead rate per hour * (Budgeted hours – Actual hours)
Or, Standard fixed overhead rate per hour * (Budgeted output – Standard output in actual hours)
Or, Budgeted fixed overhead - Standard fixed overhead

 Reasons of occurrence of Fixed Overhead Capacity Variance is

 (i.e. the reasons why actual activity & normal activity are not equal):

1. There are bottlenecks & low output which arises as a result of poor production scheduling.
2. There are machine breakdowns which are not expected.
3. There is a shortage of skilled operatives or materials.
4. Strikes
5. Natural calamities such as flood etc.

If any idle time is included in the changed capacity, then extraction & analysis of the same has to be made separately as is done for fixed overhead idle time variance.

The formula is:
                        Idle hours * Standard fixed overhead rate per hour
                 Or, Production lost in idle hours * Standard fixed overhead rate per unit.

Fixed Overhead Efficiency Variance:

 With labour efficiency variance, this variance is closely related to. Under- or over- recovery of fixed overhead arises as a result of a change in efficiency & thereby fixed overhead efficiency variance arises. A change in efficiency means that the actual hours which have been worked will be different from the standard hours of output.  Only on the basis of production, recovery of fixed overhead will be done, thus resulting in under- or over- recovery.

The formula is:
                         Standard fixed overhead rate per hour * (Actual hours – Standard hours
                                                                                                            of actual output)

Or, Standard fixed overhead rate per unit * (Standard output in actual hours   –Actual output)
Or, Fixed Overhead recovered – Standard fixed overhead.

Fixed Overhead Calendar Variance:

Where the budget of the fixed overhead is done on a monthly basis & the number of working days in the month varies, a calendar variance may be included in the volume variance. Even in situations when the whole year has been divided into a number of budget periods, & equal number of days is there in each budget period, calendar variance may result from the uneven number of holidays falling within each period. For the year, the sum of the calendar variances will always be nil.

 The formula is:
                        Excess/ deficit hours worked * Standard fixed overhead rate per hour
Or, Increase/ decrease in production due to excess/ deficit hours worked *   Standard fixed overhead rate per unit

Relationship between the variances:

 Fixed Overhead Cost Variance =Expenditure Variance + Volume Variance

Fixed Overhead Volume Variance = Capacity variance + Efficiency Variance
Or,       Fixed Overhead Volume Variance = Capacity variance + Idle time variance + Efficiency Variance + Calendar Variances.

Illustration 1:

At a certain factory budgeted quantity of 2000 units of a product are to be produced for a 20 working day month. $ 100000 was the budgeted amount of fixed overhead for the period.

During the month actual quantity of 1500 units was produced. $ 120000 was the actual amount of fixed overhead incurred for the period. At 100 units per working day was set the standard rate of production. Only 18 days were actually worked during the month.

Calculate the fixed overhead variance.

Solution: Standard Fixed Overhead per unit = Budgeted Overhead
                                                                           Budgeted Production

                                                                        =   $ 100000 = $ 50 per unit.
                                                                                 2000

Fixed Overhead recovered by Actual production = Actual Production * Standard rate

                                                = 1500 * $ 50 = $ 75000

Standard Production in actual days = Actual days worked * Standard rate of production

= 18 * 100 = 1800 units
(a) Fixed Overhead Variance = Overhead Recovered – Actual Overhead                 $

                                                = $ 75000 - $ 120000                                                45000 A

(b) Fixed Overhead Expenditure variance = Budgeted Overhead – Actual Overhead

                                                = $ 100000 - $ 120000                                             20000 A

(c) Fixed Overhead Volume Variance = Standard Rate per unit * (Budgeted
Production – Actual Production)

                                                = $ 50 * (2000 – 1500)                                           25000 A

Check: Fixed Overhead Variance = Expenditure + Volume                    45000 A

The volume variance can be analyzed now into sub-variances, viz., capacity & efficiency.

Sub-variances:
(d) Fixed Overhead Capacity Variances: Standard Rate per unit * (Budgeted
Production – Standard Production)

                                                = $ 50 * (2000 – 1800)                                        10000 A

(e) Fixed Overhead Efficiency Variance: Standard Rate per unit * (Standard Production - Actual Production)

                                                = $ 50 * (1800 – 1500)                                        15000 A

Illustration 2:

From the books of a company, the following figures are extracted:

Budgeted Overhead                           $ 40000 (fixed $ 24000, variable $ 16000)
Budgeted hours                                  500
Actual Overhead                                 $ 41600 (fixed $ 24400, variable $ 17200)
Actual hours                                        525
Calculate the overhead variances.
           
Solution: Standard fixed overhead rate per hour = Budgeted Overhead
                                                                                    Budgeted hours

                                                                            = 24000 = $ 48       
                                                                               500
           
Standard variable overhead rate per hour = Budgeted Overhead
                                                                        Budgeted hours

                                                                 = 16000 = $ 32      
                                                                     500
Fixed Overhead recovered:

= Standard hours of Actual Production (Refer notes) * Standard rate per hour
= 525 * $ 48 = $ 25200

Variable Overhead recovered:

= Standard hours of Actual Production * Standard rate per hour
 = 525 * $ 32 = $ 16800

Note: It has been assumed that standard hours of actual production & actual hours are the same as no other information is mentioned.
                                                                                                                                    $
(a) Variable Overhead Variance:
    = Overhead recovered – Actual Overhead
                                                    = $ 16800 - $ 17200                                                400 A

(b) Fixed Overhead Variance
 = Overhead recovered – Actual Overhead
                                                 = $ 25200 - $24400                                                    800 F

Further division of fixed overhead variance into Expenditure variance & Volume variance is possible.

(c) Fixed Overhead Expenditure Variance:
 = Budgeted Overhead – Actual Overhead
                                                 = $ 24000 - $ 24400                                                   400 A

(d) Fixed Overhead Volume Variance:
= Overhead recovered – Budgeted Overhead
                                                = $ 25200 - $ 24000                                                 1200 F

Check: Fixed Overhead Variance = Expenditure + Volume                        800 F

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Other topics under Standard costs:

• Establishment of Standards
• Labour Mix Variance, Revised Efficiency Variance
• Labour Variances, Direct Labour Cost Variance
• Material Mix Variance, Material Yield Variance
• Material Variances
• Sales Variances
• Setting of Standards
• Standard Costing- Introduction
• Standard Time Determination, Standard Rate Determination
• Types of Standards
• Variances based on Profit Margin, Total Sales Margin Variance
• Variable Overhead Variances