Formula: Fixed overhead volume Variance Formula

Tuesday 9 February 2016

Fixed overhead volume Variance Formula

Fixed Overhead Volume Variance Formula has been shown below. Formula of fixed overhead volume variance is being explained with an example.

Standard Rate x (Budgeted Production – Actual Production)

Fixed Overhead Volume Variance Example

Actual Production- Units = 1600

Budgeted Production - Units = 1500

Standard absorption Rate= $ 10

Solution

Standard Rate x (Budgeted Production – Actual Production)

= $ 10 x (1500-1600)

= $10 x 100

=1000 Favorable

Favorable and adverse Fixed Overhead Volume Variance

When the actual production is more than budgeted production, then this is favorable situation for the organization (favorable Fixed Overhead Volume variance), because it will lower the product cost. Where actual production is lower than budgeted production, then this would result in adverse fixed overhead volume Variance, because lower production increases the product cost.

Actual Production and Unit Fixed Cost

Because unit fixed cost decreases with increase in level of production. Therefore higher production than expected production would result in favorable fixed volume variance. Similarly lower production will increase unit fixed cost, and result in adverse fixed volume variance.

Higher production at fixed resources is due to efficient use of fixed overhead and therefore more production means favorable fixed overhead volume variance and lower production would result in adverse fixed overhead volume variance.