Fixed overhead variances (easy)

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Anzelari
Anzelari Registered Posts: 11 New contributor 🐸
in Management Accounting: Decisions and Control
Hi everyone,
Hope the following will help you calculate fixed overhead variance very quickly.

After 2 days of trying to remember all the formula used to calculate the variances. I remembered what our professor was saying in the university: "Mathematics do not have to remember they have to get it using the logic".

And I found the logic in fixed overhead calculations. Just remember easy formulas S-A = (S-B) + (B-A) and S-B = (S-AA) + (AA-B), where
B - Budgeted overheads, S - Standard overheads, A- Actual overheads, AA- Absorbed overheads
B and A are usually known, Standard overheads = OAR x standard hours (calculated using flexing budget rules), AA = actual hours x OAR

please, see the picture for more information

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  • Anzelari
    Anzelari Registered Posts: 11 New contributor 🐸
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  • Anzelari
    Anzelari Registered Posts: 11 New contributor 🐸
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  • Anzelari
    Anzelari Registered Posts: 11 New contributor 🐸
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  • mcchoc
    mcchoc Registered, Tutor Posts: 59 Regular contributor ⭐
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    That's one way . . .

    I prefer - Total OH Variance is the difference between what it did cost and what it should have cost.

    This total variance breaks down into expenditure variance (which ignores the 'should have' bit) and volume variance.

    Volume then breaks down again into efficiency and capacity.

    Capacity Variance is the one that usually causes problems as it is not so instinctive. If we actually use fewer hours than the original base budget, this is Adverse because we ae not fully using those assets we have invested in.
  • Anzelari
    Anzelari Registered Posts: 11 New contributor 🐸
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    Hi, mcchoc. Thank you for your comment! How do you remember how to calculate all these variances?
  • PeterC
    PeterC Registered, Tutor Posts: 245 Dedicated contributor 🦉
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    As mcchoc says, look at the difference between what should happen and what actually happened.

    In your example, each unit should take 0.005 hours (500/100,000) and you recover £100 overhead per hour (£50,000/500)

    So, 96,000 units should take 480 hours (96,000 x 0.005)
    They actually took 510 hours, 30 hours too long
    This is an efficiency problem, which reduces your overhead recovery by £3,000 (30 hrs x £100/hr)
  • mcchoc
    mcchoc Registered, Tutor Posts: 59 Regular contributor ⭐
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    Foolproof method for Materials and Labour variances

    Create three columns BudgetActualStandard

    Under each title, tear the data to shreds, ie kg/unit, £/kg, total Kg, total material cost; hours/unit, £/labour hour, total labour hours, total labour cost.

    Remember - the Standard Budget is just the original budget flexed by the new Volume, so we flex the quantities of materials and labour hours, but NOT the unit price.

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