Fixed Overhead Variances

PAMDILL

Can someone explain why in the Volume variances if the actual hours worked are less than the standard and the amount of overheads therefore absorbed are less than budgeted the variance is favourable.

i.e. actual hours worked 4,000, OAR = £30/hr

standard hours 4200

actual - standard x OAR = £6,000 favourable.

Surely this should be adverse as only £120,000 has been absorbed instead of £126,000.

Favourable variances increase profit and decrease cost do they not?

I cannot get my head around Fixed overhead variances at all.!!

SandyHood

I've a couple of answers to this question on other occassions

Please let me know if these links help

from old discussion forum

from last year

SandyHood

Absorb based on standard hours produced (not hours worked)
(units produced x standard hours per unit)

If more actual time was worked than the budgeted time this means the firm had MORE CAPACITY

If the hours worked were more than the standard hours produced that indicates LESS EFFICIENCY