Definition
Fixed Overhead Volume Variance (also known as Overhead Volume Variance or Volume Variance) in the context of a standard costing system, refers to the difference between the actual production in units and the budgeted production in units, valued at the standard fixed overhead absorption rate per unit. This variance measures the extent of over- or under-recovery of fixed overheads due to deviations in actual activity levels as compared to budgeted activity levels.
Formula
\[ \text{Fixed Overhead Volume Variance} = (\text{Actual Production Units} - \text{Budgeted Production Units}) \times \text{Standard Fixed Overhead Absorption Rate per Unit} \]
Examples
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Example 1:
- Budgeted Production Units: 10,000
- Actual Production Units: 12,000
- Standard Fixed Overhead Absorption Rate per Unit: $10
\[ \text{Fixed Overhead Volume Variance} = (12,000 - 10,000) \times $10 = 2,000 \times $10 = $20,000 (Favorable) \]
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Example 2:
- Budgeted Production Units: 8,000
- Actual Production Units: 6,500
- Standard Fixed Overhead Absorption Rate per Unit: $15
\[ \text{Fixed Overhead Volume Variance} = (6,500 - 8,000) \times $15 = -1,500 \times $15 = -$22,500 (Unfavorable) \]
Frequently Asked Questions
What does a favorable fixed overhead volume variance indicate?
A favorable fixed overhead volume variance indicates that the actual production exceeded the budgeted production, leading to a higher absorption of fixed overheads than anticipated.
What causes an unfavorable fixed overhead volume variance?
An unfavorable fixed overhead volume variance occurs when actual production falls short of budgeted production, resulting in under-absorption of fixed overheads.
How does fixed overhead volume variance affect financial statements?
The fixed overhead volume variance affects the cost of goods sold (COGS) and, subsequently, the net income. Favorable variances reduce COGS and increase net income, whereas unfavorable variances increase COGS and reduce net income.
Is fixed overhead volume variance always controllable?
Fixed overhead volume variance can sometimes be controllable depending on the nature of the production process and the capacity of the facilities. However, external factors such as demand fluctuations or supply chain disruptions can also contribute to the variance.
What is the role of standard fixed overhead absorption rate per unit?
The standard fixed overhead absorption rate per unit is used to allocate fixed overhead costs to each unit of production. It is crucial for calculating variances and determining whether fixed overheads are over or under-recovered.
Related Terms with Definitions
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Standard Costing: A cost accounting method used to set estimated costs for production and reporting variances between these estimates and the actual costs.
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Budgeted Production: The estimated or planned number of units to be produced within a specific period.
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Actual Production: The real number of units produced within a specific period.
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Fixed Overhead: The portion of total overhead costs that remain constant irrespective of the level of production or business activity.
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Over-Absorption: A situation where the fixed overheads absorbed are greater than the actual fixed overheads incurred.
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Under-Absorption: A condition where the fixed overheads absorbed are less than the actual fixed overheads incurred.
Online References
- Investopedia: Standard Costing
- Accounting Tools: Overhead Volume Variance
- Corporate Finance Institute: Variance Analysis
Suggested Books for Further Studies
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan.
- “Management and Cost Accounting” by Colin Drury.
- “Advanced Management Accounting” by Robert S. Kaplan and Anthony A. Atkinson.
- “Principles of Cost Accounting” by Edward J. Vanderbeck and Maria R. Mitchell.
Accounting Basics: Fixed Overhead Volume Variance Fundamentals Quiz
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