The total fixed factory overhead variance may be split into two: spending variance and volume variance. The fixed overhead volume variance refers to the difference between the budgeted and standard (or applied) fixed factory overhead. It is also known as fixed overhead capacity variance.
In standard costing, an anticipated amount is used to enable better control over costs and faster recording process. A predetermined rate known as budgeted rate is applied to a standard base to arrive at the standard or applied factory overhead. The most common bases used for factory overhead are: labor hours and machine hours.
Example: A company estimates factory overhead to be $12 per labor hour. One unit of its product requires 2 labor hours to complete. If the company produces 10,000 units, the estimated standard factory overhead would be $240,000 (20,000 hours x $12).
To better manage factory overhead costs, standards may be established separately for variable and fixed overhead.
The formula for fixed factory overhead (FFOH) volume or capacity variance is:
FFOH volume variance = Budgeted FFOH - Standard FFOH
The standard (or "applied") fixed factory overhead is computed by multiplying the standard base for the actual output, by the budgeted application rate.
XYZ Company has a fixed factory overhead budget of $220,000 for a budgeted production (normal capacity) of 10,000 units of its product. One unit needs 2.75 labor hours to complete -- requiring a total of 27,500 hours. XYZ produced 9,600 units and employed 29,000 direct labor hours. The actual fixed factory overhead is $228,500. Using labor hours as the allocation base, compute for the fixed overhead volume variance.
|Budgeted application rate||=||$220,000 / 27,500 hours|
|=||$8 per labor hour|
|Standard FFOH||=||Standard hours for actual output x Budgeted rate|
|=||(9,600 units x 2.75 hours) x $8|
|FFOH volume variance||=||Budgeted FFOH - Standard FFOH|
|=||$220,000 - $211,200|
|FFOH volume variance||=||$8,800 unfavorable|
If the resulting amount is positive, i.e. the budgeted fixed factory overhead is greater than the standard, it means that the company has under-utilized capacity. Hence, the variance is unfavorable. If the standard FFOH is higher, the company was able to exceed its capacity; hence a favorable variance.