Monday, February 22, 2010

Fixed production overhead variances

The total fixed production variance is an attempt to explain the under- or over-absorbed fixed production overhead.

Remember that overhead absorption rate =
Budgeted fixed production overhead
Budgeted level of activity
If either the numerator or the denominator or both are incorrect then we will have under- or over-absorbed production overhead.

  • If actual expenditure ± budgeted expenditure (numerator incorrect) » expenditure variance
  • If actual production / hours of activity » budgeted production / hours of activity (denominator incorrect) » volume variance.
  • The workforce may have been working at a more or less efficient rate than standard to produce a given output » volume efficiency variance (similar to the variable production overhead efficiency variance).
  • Regardless of the level of efficiency, the total number of hours worked could have been more or less than was originally budgeted (employees may have worked a lot of overtime or there may have been a strike and so actual hours worked were less than budgeted) » volume capacity variance.

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