The factory worked for 26 days putting in 860 hours work every day and achieved an output of 2,050 units. The expenditure incurred as overheads was 49,200 towards variable overheads and 86,100 towards fixed overheads.

Calculate overhead variances

The working table is populated with the information that can be obtained as it is from the problem data. The rest of the information that is present in a full fledged working table that we make use of in problem solving is filled below.

Fixed Overhead Volume Variance is the difference between the absorbed fixed overhead cost and the standard fixed overhead cost for actual output.

⇒ Fixed Overhead Volume Variance (FOHVOLV)

Absorbed Cost (Fixed Overhead)

Where the absorbed cost is not known we may have to calculate the cost. This calculation is based on the rate of absorption that has been used in the context to absorb total overheads.

• Absorption based on output (units)

  Absorbed Cost ~ AbC

  	=	AO × AbR/UO
  Or	=	SI(AO) × AbR/UI
  Or	=	SP(AO) × AbR/UP

• Absorption based on inputs

  Absorbed Cost ~ AbC

  	=	AI × AbR/UI
  Or	=	SO(AI) × AbR/UO
  Or	=	SP(AI) × AbR/UP

• Absorption based on periods

  Absorbed Cost ~ AbC

  	=	AP × AbR/UP
  Or	=	SO(AP) × AbR/UO
  Or	=	SI(AP) × AbR/UI

Budgeted Cost (Fixed Overhead)

In problem solving the budgeted fixed cost is generally provided as a calculated figure.

Where the budgeted cost is not known we may have to calculate the cost. This calculation requires a measure of budgeted activity and the relevant rate.

Budgeted Cost ~ BC(F)

Formula in useful forms

Note

• BC, BR/UO, BR/UT, BR/D in the above calculations pertains to fixed overheads.
• Theoretically there are many possibilities. Only those that provide peculiar routes to solve problems are given as an academic exercise.
• Finding the costs by building up the working table and using the formula involving costs is the simplest way to find the FOHVOLV.

In the absence of information to the contrary we assume

Absorbed Fixed Overhead Cost ~ AbC(F)

Fixed Overhead Volume Variance

Alternatives

• Calculations based on input (time)

  The absorbed overhead may be ascertained using the data relating to input.

  Standard input (time) for actual output and the overhead absorption rate per unit input are required for such a calculation.

  One unit per 10 hours productive time

  ⇒ Budgeted Time per unit = 10 hours

  Total Budgeted Time

  =	Budgeted Output × Budgeted Time/unit
  =	2,000 units × 10 hrs/unit
  =	20,000 hrs

  Total Actual Time

  =	Number of Days × Actual Time/day
  =	26 days × 860 hrs/day
  =	22,360 labor/labour hrs

  ST(AO)	=	BT × AO BO
  	=	20,000 hrs × 1.025
  	=	20,500 hrs

  In the absence of information to the contrary we assume

  AbR/UT(F)	=	BR/UT(F)
  	=	4

  Absorbed Variable Overhead Cost ~ AbC(V)

  =	ST(AO) × AbR/UT(V)
  =	20,500 hrs × 4/hr
  =	82,000

• Calculations based on periods (days)

  The absorbed overhead may be ascertained using the data relating to periods, days in this case.

  Standard periods (days) for actual output and the overhead absorption rate per unit period (day) are required for such a calculation.

  SD(AO)	=	BD × AO BO
  	=	25 days × 1.025
  	=	25.625 days

  In the absence of information to the contrary we assume

  AbR/D(F)	=	BR/D(F)
  	=	3,200

  Absorbed Variable Overhead Cost ~ AbC(F)

  =	SD(AO) × AbR/D(V)
  =	25.625 days × 3,200/day
  =	82,000

Building the working table with all the values needed and then using the formula based on values would be the simplest method to arrive at the value of the variance.

The method of absorption adopted and the method of calculation adopted would influence the calculation of the overhead absorbed only.

One unit per 10 hours productive time

⇒ Budgeted Time per unit = 10 hours

Total Budgeted Time

Total Actual Time

In the absence of information to the contrary we assume

Absorbed Fixed Overhead Cost ~ AbC(F)

Fixed Overhead Volume Variance

Alternatives

The alternatives given below pertain to calculating the absorbed overhead in an alternative manner.

• Calculations based on output

  The absorbed overhead may be ascertained using the data relating to output.

  Standard output for actual input (time) and the overhead absorption rate per unit output are required for such a calculation.

  SO(AT)	=	BO × AT BT
  	=	2,000 units × 1.118
  	=	2,236 units

  In the absence of information to the contrary we assume

  AbR/UO(T)	=	BR/UO(T)
  	=	40

  Absorbed Fixed Overhead Cost ~ AbC(T)

  =	SO(AT) × AbR/U(T)
  =	2,236 units × 40/unit
  =	89,440

• Calculations based on periods (days)

  The absorbed overhead may be ascertained using the data relating to periods, days in this case.

  Standard periods (days) for actual output and the overhead absorption rate per unit period (day) are required for such a calculation.

  SD(AT)	=	BD × AT BT
  	=	25 days × 1.118
  	=	27.95 days

  In the absence of information to the contrary we assume

  AbR/D(T)	=	BR/D(T)
  	=	3,200

  Absorbed Fixed Overhead Cost ~ AbC(F)

  =	SD(AO) × AbR/D(T)
  =	27.95 days × 3,200/day
  =	89,440

Building the working table with all the values needed and then using the formula based on values would be the simplest method to arrive at the value of the variance.

The method of absorption adopted and the method of calculation adopted would influence the calculation of the overhead absorbed only.

In the absence of information to the contrary we assume

Absorbed Fixed Overhead Cost ~ AbC(F)

Fixed Overhead Volume Variance

Alternatives

• Calculations based on inputs (time)

  The absorbed overhead may be ascertained using the data relating to input (time).

  Standard input (time) for actual periods (days) and the overhead absorption rate per unit input are required for such a calculation.

  One unit per 10 hours productive time

  ⇒ Budgeted Time per unit = 10 hours

  Total Budgeted Time

  =	Budgeted Output × Budgeted Time/unit
  =	2,000 units × 10 hrs/unit
  =	20,000 hrs

  Total Actual Time

  =	Number of Days × Actual Time/day
  =	26 days × 860 hrs/day
  =	22,360 labor/labour hrs

  ST(AD)	=	BT × AD BD
  	=	20,000 hrs × 1.04
  	=	20,800 hrs

  In the absence of information to the contrary we assume

  AbR/UT(F)	=	BR/UT(F)
  	=	4

  Absorbed Fixed Overhead Cost ~ AbC(F)

  =	ST(AD) × AbR/UT(F)
  =	20,800 hrs × 4/hr
  =	83,200

• Calculations based on output

  The absorbed overhead may be ascertained using the data relating to output.

  Standard output for actual periods (days) and the overhead absorption rate per unit output are required for such a calculation.

  SO(AD)	=	BO × AD BD
  	=	2,000 units × 1.04
  	=	2,080 units

  In the absence of information to the contrary we assume

  AbR/UO(F)	=	BR/UO(F)
  	=	40

  Absorbed Fixed Overhead Cost ~ AbC(F)

  =	SO(AD) × AbR/UO(F)
  =	2,080 units × 40/unit
  =	83,200

Building the working table with all the values needed and then using the formula based on values would be the simplest method to arrive at the value of the variance.

The method of absorption adopted and the method of calculation adopted would influence the calculation of the overhead absorbed only.

• Nature of Variance

  Based on the relations derived from the formulae for calculating FOHVOLV, we can identify the nature of Variance

  • AbC ___ BC

  The variance would be

  • zero when =
  • Positive when >
  • Negative when <

• Interpretation of the Variance

  The following interpretations may be made

  No Variance

  The absorbed fixed overhead cost is the same as the budgeted cost

  Favourable/Favorable

  The absorbed fixed overhead cost is greater than the budgeted cost

  Adverse

  The absorbed fixed overhead cost is lesser than the budgeted cost

• Who is answerable for the Variance?

  Fixed Overhead Volume Variance represents the gain or loss on account of putting the production facility to use to a greater/lesser extent. Those who are responsible for putting the production facility to use would be made answerable for the variance.

• Reasons for variance can be further specified

  The fixed overhead volume variance would only let us know that the production facility has been put to use to a greater/lesser extent than planned/budgeted. It does not help us answer specific questions relating to the variance like, is it on account of the variation in the periods worked or the inputs used or efficiency.

  Taking the data from the above illustration, we can notice that variance in fixed overhead cost may be on account of

  • The actual overhead incurrence rate per unit time/output being different from the budgeted rate.

    Overhead Rate per unit - Actual 22 to 20 budgeted.

    Overhead Rate per unit time - Actual 2.02 to 2 budgeted.

  • The rate at which the output has been achieved is different from the budgeted rate.

    Time per unit output - 10.91 actual to 10 budgeted.

    	Standard				Actual	Absorbed
    	Budgeted	for AO	for AI	for AP
    	A				B	C
    a) Output (units) b) Periods (Days) c) Time (hrs) d) Overhead Cost ... g) Time/unit(hrs) (c) ÷ (a)	2,000 25 20,000 10				2,050 26 22,360 10.91

    The actual time per unit shown as 10.91 is an approximation of

    2,236

    205

  This specific identification can be obtained by breaking down the variance into its constituent parts.

Alternative

In such a case the Absorption Variance does not exist and the Fixed Overhead Volume Variance may be divided into only three component parts, the capacity, calendar and efficiency variances.

The only difference is in the terms that appear in the formula for efficiency variance and the absence of absorption variance. Absorbed cost (AbC) replaces standard cost of actual output [SC(AO)] in the formula for efficiency variance.

1. FOHVOLV = FOHCV − FOHEXPV
2. FOHVOLV = FOHABSV + FOHCAPV + FOHCALV + FOHEFFV

Verification

To enable understanding we have worked out the illustration under the three possible scenarios of overhead being absorbed on output, input and period basis.

Please be aware that only one of these methods would be in use.