Fixed Overhead Volume Variance

System

Hi everone hope the studying is going ok. I'm a bit confused and was hoping someone could help.

In my book the formula for the Volume Variance is:-

Absorption Rate x (Actual Output - Budgeted Output)

After doing some past papers i seem to be always getting this one wrong. I've looked in my book again and realised there is another calculation:-

Absorption Rate x (Standard Hours for Actual Output - Standard Hours for Budgeted Output).

Can someone explain how to decide which calculation needs to be used. I just attempted a question and used the wrong one again. Please help :?

System

Re:Fixed Overhead Volume Variance

Hi Jan

The formula you need to be remembering is your second one.

Comparing standard hours with budgeted hours x the absorption rate.

Here is a good list of how to remember them posted earlier by EvaG

http://www.aat.org.uk/forums/posts/list/11598.page

Regards

Dean

System

Re:Fixed Overhead Volume Variance

Dean,

So does that mean i'll never have to use the first formula again?

System

Re:Fixed Overhead Volume Variance

The cause of the variance is the difference between what was produced and the budgeted production.

The value of the variance is the difference x the overhead per unit.

In my book the formula for the Volume Variance is:-

Absorption Rate x (Actual Output - Budgeted Output)

So change it to
Absorption amount per unit x (Actual Output - Budgeted Output)

Then it will give you the same answer as:

Absorption Rate x (Standard Hours for Actual Output - Standard Hours for Budgeted Output).

Try it on an example and you will see

Budgeted Output 1000
Actual Output 990

Standard labour hours per unit 5.00
Overhead absorption rate £4.00 per hour

and of course the overhead per unit would be 5 x £4 = £20

System

Re:Fixed Overhead Volume Variance

Thanks Sandy that really helped, it's much clearer now