**Overhead cost variances** can be:

**1.** fixed overhead and** 2.** variable overhead variances.

## 1. Fixed overhead variances:

It is that cost which is not directly related to output, it is in general time-related cost. It is that cost which is a difference between standard cost and fixed overhead allowed for actual output achieved and the actual

fixed overhead cost incurred.

### Formula to calculate fixed overhead variances

The formula of calculation of fixed overhead variances are :

**= Actual output x Standard fixed overhead rate – Actual fixed overheads**

The following are the other variances :

### (i) Expenditure Variance

This variance shows the over or under absorption of fixed overheads during a particular period. When the actual output is more than the standard output, this is over-recovery of fixed overheads. This can be:

**= (Standard overhead – Actual overhead)**

### (ii) Volume Variances

It is favorable and vice-versa if the actual output is less than the standard output. It is due to the nature of fixed overheads which are not expected to change with the change in output. This variance can be expressed as:

**Volume variance = (Actual output x Standard rate) – Budgeted fixed overheads**

Volume variance can further be divided into three variances as:

**(a)** Capacity Variances

**(b)** Calendar Variance.

**(c)** Efficiency Variance

**(a) Capacity Variances**

This is a proportion of volume variance which arises due to high or low working capacity. This can be due to idle time. Machine break down, power failure strikes or lockouts or shortage of materials and labor etc. Thus, standard rate (Revised budgeted units – budgeted hours).

**(b) Calendar variance**

This variance arises due to the difference in the number of working days when actual working days are more than the standard working days. It will be favorable variance. This can be:

**Calendar variance = No. of working days more or less x Standard Rate per unit.**

**(c) Efficiency Variance**

This is the portion of Volume Variance which is due to the difference between the budgeted efficiency of output and the actual efficiency achieved. This is due to labor working efficiency Thus, it can be:

**Efficiency variance = St. Rate (Actual Production — St. production ) in units.**

## 2. Variable Overhead Variance

These expenses go up or down in proportion to output. Thus, these variances are the difference between the standard cost of overhead allowed for the actual output achieved and the actual overhead cost incurred. This variance is separately calculated for direct variable expenses and overhead variable expenses. The per-unit cost does not change due to the change in the quantity of output. The price variance can be held responsible for the variable overhead variance. It can be computed as:

**Variable overhead cost variance = (St. Cost – Actual Cost)**

Thus St. Cost = Actual output x St. rate of variable overhead cost.

## Example

**(Fixed overhead variances)**

From the following information, compute fixed overhead cost, expenditure and volume variances.

Normal capacity is 5,000 hours. Budgeted fixed overhead rate is $10 per standard hour. Actual level of capacity utilized is 4,400 standard hours. Actual fixed overhead $52,000.

### Solution.

**1. Fixed Overhead Cost Variance**

= Absorbed overhead – Actual overhead

= (4,400 hours x $10) – 52,000

= $8,000 (A)

**2. Expenditure Variance**

= Budgeted overhead – Actual overhead

= (5,000 hrs. x $10) – 52,000

= $2,000 (A)

**3. Volume variance**

= Absorbed overhead – Budgeted overhead

= (4,400 hrs. x $10) – (5,000 hrs. x $10)

= 44,000 – 50,000

= $6,000 (A)

**Verification**

Overhead cost variance = Expenditure variance + Volume variance

8,000 (A) = 2,000 (A) + 6,000 (A)

## Problem

In department A of a plant, the following data are submitted for the week ending 31st March, 2019:

Standard output for 40 hours per week = 1,400 units

Budgeted Fixed Overhead = $1,400

Actual output = 1,200 units

Actual hours worked = 32 hours

Actual fixed overhead = $1,500

You are required to prepare a statement of variances.

### Solution

**Basic Calculations**

(i) Standard overhead rate per unit = Bugdeted Fixed overhead / Budgeted output

= $1,400 / 1,400 units = $1

(ii) St. quantity per hour = 1,400 units / 40 hrs. = 35 units

(iii) St. quantity for actual hours = (1,400 units x 32 hrs.) / 40 hrs.

= 1,120 units

(iv) Recovered overhead = 1,200 units x $1 = $1,200

(v) Standard overhead = 1,120 units @ $1 = $1,120

**Calculations of variances**

**1. Fixed overhead cost variance**

= Recovered overhead – Actual overhead

= 1,200 – 1,500 = $300 (A)

**2. Expenditure variance**

= Budgeted overhead – Actual overhead

= 1,400 – 1,500 = $100 (A)

**3. Volume variance**

= Recovered overhead – Budgeted overhead

= 1,200 – 1,400 = $200 (A)

Volume variance is further sub-divided into Efficiency variance and capacity variance.

**4. Efficiency Variance**

= Recovered overhead – Standard overhead

= 1,200 – 1,120 = $80 (F)

5. Capacity variance

= Standard overhead – Budgeted overhead

= 1,120 – 1,400 = $280 (A)

## Problem 2

The following information was obtained from the record of a manufacturing unit using standard costing system:

Standard | Actual | |

Production | 4,000 units | 3,800 units |

Working days | 20 | 21 |

Fixed overhead | $40,000 | $39,000 |

Variable overhead | $12,000 | 12,000 |

**Required**

You are required to calculate the following overhead variances:

**(a)** Variable overhead variances

**(b)** Fixed overhead

- Expenditure variance
- Volume variance
- Efficiency variance
- Calendar variance

**(c)** Also, prepare a reconciliation statement for the standard fixed expenses worked out at standard fixed overhead rate and actual fixed overhead.

### Solution

V.O. St. rate per unit = $12,000 / 4,000 units = $3

F.O. St. rate per unit = $40,000 / 4,000 units = $10

St. production per day = 4,000 units / 20 days = 200 units

F.O St. rate per day = 200 units x $10 = $2,000

Recovered variable overhead = 3,800 x 3 = $11,400

Recovered fixed overhead = 3,800 x 10 = $38,000

St. fixed overhead = 200 units x 21 days x $10 = $42,000

**Calcualtion of variances:**

**(a) Variable overhead variance **

= (Recovered overhead – Actual overhead)

= 11,400 – 12,000 = $600 (A)

**(b) Fixed overhead variance **

= (Recovered overhead – Actual overhead)

= 38,000 – 39,000 = $1,000 (A)

(i) Expenditure variance

= Budgeted overhead – Actual overhead

= 40,000 – 39,000 = $1000 (F)

(ii) Volume variance

= Recoved overhead – Budgeted overhead

= 38,000 – 40,000 = $2,000 (A)

(iii) Efficiency variance

= Recovered overhead – Standard overhead

= 38,000 – 42,000 = $4,000

(iv) Calendar variance

= (Actual days – Budgeted days) x SR per day

= (21 – 20) x 2,000 = $2,000 (F)

### Reconciliation Statement

Recovered Fixed overhead | $38,000 | |

Less Fixed overhead exp. variance | 1,000 (F) | |

Less Fixed overhead calendar variance | 2,000 (F) | 3,000 (F) |

35,000 | ||

Add fixed overhead efficiency variance | 4,000 (A) | |

Actual fixed overhead | 39,000 |