Get Tips and Tutorials for ACCA AND CAAT Students: Fixed production overhead variances

Monday, February 22, 2010

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.