Fixed Overhead Total Variance

Fixed Overhead Total Variance Standard Costing Overhead Management Variance Analysis Cost Accounting Budgeting
In a system of standard costing, the fixed overhead total variance represents the difference between the standard fixed overhead absorbed for the actual units produced and the actual fixed overhead expenditure incurred.
On this page

Definition

Fixed Overhead Total Variance refers to the discrepancy between the standard fixed overhead that was anticipated based on the actual units produced and the actual fixed overhead expenses incurred. This variance is a vital component in variance analysis within the framework of standard costing, serving as a key indicator of how well a business is managing its overhead costs.

In practice, this variance includes multiple aspects:

  1. Fixed Overhead Spending Variance: The difference between the budgeted fixed overhead and the actual fixed overhead costs.
  2. Fixed Overhead Volume Variance: The discrepancy between the standard fixed overhead allocated based on actual production and the fixed overhead costs allocated based on standard production levels.

Examples

Example 1:

A manufacturing company budgeted $50,000 for fixed overhead costs for a month. With a standard output of 10,000 units, the fixed overhead rate per unit is $5. However, during that month, only 9,000 units were produced, and the actual fixed overhead expenditure was $52,000.

Calculation:

  • Standard Fixed Overhead Absorbed = 9,000 units * $5/unit = $45,000
  • Fixed Overhead Total Variance = Actual Fixed Overhead - Standard Fixed Overhead
  • Fixed Overhead Total Variance = $52,000 - $45,000 = $7,000 (unfavorable)

Example 2:

A company sets a budget of $80,000 for fixed overhead costs with an expected production output of 20,000 units, implying a fixed overhead rate of $4 per unit. Actual production ends up being 19,000 units, and actual fixed overhead costs total $79,000.

Calculation:

  • Standard Fixed Overhead Absorbed = 19,000 units * $4/unit = $76,000
  • Fixed Overhead Total Variance = $79,000 - $76,000 = $3,000 (unfavorable)

Frequently Asked Questions

What is the purpose of analyzing Fixed Overhead Total Variance?

The analysis helps management identify deviations from budgeted overhead costs, which can indicate inefficiencies or changes in production processes. This insight allows for more informed decision-making regarding cost control and budgeting.

How does Fixed Overhead Total Variance differ from Variable Overhead Variance?

Fixed Overhead Total Variance deals with fixed overhead costs, which do not change with the level of production, whereas Variable Overhead Variance pertains to variable costs, which fluctuate with production volume.

Can Fixed Overhead Total Variance be both favorable and unfavorable?

Yes, a favorable variance occurs when the actual fixed overhead is less than the standard fixed overhead absorbed, while an unfavorable variance occurs when the actual fixed overhead exceeds the standard fixed overhead absorbed.

What steps can a company take if they experience an unfavorable Fixed Overhead Total Variance regularly?

The company should investigate the root causes of the variances, such as inefficiencies in production processes, inaccurate budgeting, or changes in fixed cost structure. Implementation of tighter cost control measures and more accurate forecasting might be necessary.

Is the Fixed Overhead Total Variance relevant for all industries?

While the concept is particularly relevant in manufacturing and other production-centric industries, any business with significant fixed overhead costs can benefit from understanding and managing this variance.

  • Standard Costing: An accounting method that uses standard costs for materials, labor, and overhead to compare against actual costs.
  • Overhead Total Variance: The cumulative effect of differences between the total budgeted overhead costs and the actual overhead incurred.
  • Fixed Overhead Spending Variance: The difference between the budgeted fixed overhead and the actual fixed overhead costs.
  • Fixed Overhead Volume Variance: The variance arising from the difference between the budgeted production volume and the actual production volume.

References

Suggested Books for Further Studies

  1. “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan
  2. “Management and Cost Accounting” by Colin Drury
  3. “Principles of Cost Accounting” by Edward J. Vanderbeck and Maria R. Mitchell

Accounting Basics: “Fixed Overhead Total Variance” Fundamentals Quiz

### What does the Fixed Overhead Total Variance measure? - [x] Difference between the standard fixed overhead absorbed for actual units produced and actual fixed overhead expenditure incurred. - [ ] Difference between variable overhead costs and fixed overhead costs. - [ ] Total budgeted fixed overhead costs. - [ ] Actual revenue and actual fixed overhead costs. > **Explanation:** Fixed Overhead Total Variance measures the discrepancy between the standard fixed overhead anticipated based on actual units produced and the actual fixed overhead expenses incurred. ### What contributes to Fixed Overhead Total Variance? - [x] Both Fixed Overhead Spending Variance and Fixed Overhead Volume Variance. - [ ] Only Variable Overhead Spending Variance. - [ ] Only Fixed Overhead Volume Variance. - [ ] Only administrative expenses. > **Explanation:** Fixed Overhead Total Variance consists of two components: Fixed Overhead Spending Variance and Fixed Overhead Volume Variance. ### Why is Fixed Overhead Total Variance important? - [x] It provides insight into how well a business is managing its overhead costs. - [ ] Because it directly affects variable cost management. - [ ] Because it shows the total revenue for a period. - [ ] It indicates inventory levels. > **Explanation:** Fixed Overhead Total Variance is crucial as it indicates how well a company is managing its overhead costs compared to its budget. ### When is a Fixed Overhead Total Variance considered favorable? - [x] When actual fixed overhead costs are less than the standard fixed overhead absorbed for actual units produced. - [ ] When actual fixed overhead costs exceed the standard fixed overhead absorbed for actual units produced. - [ ] When budgeted costs exceed actual costs. - [ ] When variable costs exceed fixed overhead. > **Explanation:** A favorable Fixed Overhead Total Variance occurs when actual fixed overhead costs are less than the standard fixed overhead absorbed for the actual production volume. ### What is indicated by an unfavorable Fixed Overhead Total Variance? - [ ] Inefficient variable cost management. - [x] Actual fixed overhead costs exceeding standard fixed overhead absorbed. - [ ] Reduced production volume. - [ ] Increased net profit. > **Explanation:** An unfavorable Fixed Overhead Total Variance indicates that actual fixed overhead costs are higher than the standard fixed overhead for the actual production output, suggesting inefficiencies or budget discrepancies. ### How can Fixed Overhead Total Variance be reduced? - [x] By improving production efficiency and tighter cost control. - [ ] By increasing sales. - [ ] By increasing variable costs. - [ ] By reducing product prices. > **Explanation:** Reducing the Fixed Overhead Total Variance can be achieved through better production efficiency and rigorous cost control practices. ### Which component of Fixed Overhead Total Variance arises from production volume discrepancies? - [ ] Fixed Overhead Spending Variance. - [x] Fixed Overhead Volume Variance. - [ ] Variable Overhead Variance. - [ ] Direct Material Variance. > **Explanation:** Fixed Overhead Volume Variance arises due to discrepancies between the budgeted and actual production volumes. ### What type of costs are analyzed under Fixed Overhead Total Variance? - [x] Fixed overhead costs that do not vary with production levels. - [ ] Variable costs that vary with production levels. - [ ] Administrative costs independent of production. - [ ] Direct labor costs. > **Explanation:** Fixed Overhead Total Variance examines fixed overhead costs, which remain constant regardless of production levels. ### What might frequent unfavorable Fixed Overhead Total Variance indicate? - [ ] Precision in budget forecasting. - [ ] Inefficiencies or changes in fixed cost structures that need addressing. - [ ] Effective cost control measures. - [x] Opportunities to decrease sales. > **Explanation:** Frequent unfavorable Fixed Overhead Total Variance suggests inefficiencies or a need to reassess fixed cost structures and improve cost control measures. ### Who is most likely to use the analysis of Fixed Overhead Total Variance? - [x] Managers for informed decision-making and cost control. - [ ] Customers to decide on purchases. - [ ] Sales teams for pricing strategies. - [ ] Shareholders to determine dividends. > **Explanation:** Managers utilize Fixed Overhead Total Variance analysis to make informed decisions regarding cost control and operational efficiency.

Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging quiz questions on Fixed Overhead Total Variance. Keep striving for excellence in your financial knowledge!

Tuesday, August 6, 2024
Fixed Overhead Volume Variance
Fixed Overhead Expenditure Variance
Standard Direct Materials Price January 1, 1
Basic Standard January 1, 1
Direct Labour Efficiency Variance January 1, 1
Price Variance January 1, 1
Sales Margin Volume Variance January 1, 1
Sales Volume Variance January 1, 1
Standard Costing January 1, 1
Standard Costing January 1, 1
Standard Direct Materials Cost January 1, 1
Standard Marginal Costing January 1, 1

Accounting Terms Lexicon

Discover comprehensive accounting definitions and practical insights. Empowering students and professionals with clear and concise explanations for a better understanding of financial terms.