Fixed Overhead Capacity Variance Formula

Fixed Overhead Capacity Variance Formula

Fixed Overhead Capacity Variance Formula has been shown below. The concept of fixed overhead capacity variance has been clarified with an example.

Fixed overhead capacity = standard rate x (budgeted hours - actual Hours)

Fixed overhead capacity primarily shows about the utilization of available resources. In simplest term it is comparison between budgeted or available resources utilized resources. It is important to remember that actual hour in this case can never exceed the budgeted over.

Fixed Overhead Capacity Variance Formula Example

Budgeted  Production   = 1800 Units

Actual production        = 1200 Units

Budgeted Hour            = 8 Per Unit

Actual Production  Hrs  = 12000

Standard absorption Rate= 12

Calculated fixed capacity variance?

Solution

Budgeted Production hours = 1800 x 8= 14400

Fixed overhead capacity =Standard Rate x (Budgeted Hours - Actual Hours)

= $ 12 x (14400-12000)

= $ 12 – 2400

= 28800 (Adverse)

Favorable and Adverse Fixed capacity Variance

More working hours are recommended (favorable), because more working hours will result in over absorption of overhead (cost saving). On other hand less working hour is not recommended or adverse situation for the company, because it means under absorption of overheads (increase in production cost).

Significance of Fixed overhead Capacity Variance

Fixed overhead capacity variance provides useful information about the idle capacity (resources not utilized). This information can be used for future resource planning and budgeting. It is important to remember that idle resource or capacity means that company is paying for no work.

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