Fixed Overhead Volume Variance

System
System Posts: 100,534 🤖 Admin 🤖
edited 10:25AM in AAT student discussion
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 :?

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    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
    System Posts: 100,534 🤖 Admin 🤖
    Re:Fixed Overhead Volume Variance

    Dean,

    So does that mean i'll never have to use the first formula again?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    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
    System Posts: 100,534 🤖 Admin 🤖
    Re:Fixed Overhead Volume Variance

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

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