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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*.

Contents

- Definition of fixed volume variance
- Standard or applied fixed factory overhead
- Formula
- Example
- Favorable and unfavorable 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 | |

= | $211,200 |

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.

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