Accounting Assignment Help With Classification of Fixed overhead volume

4.7.3.1 Classification of Fixed overhead volume

Fixed overhead volume variance can be sub-divided into:

1) Fixed overhead efficiency variance

2) Fixed overhead calendar variance

3) Fixed overhead capacity variance

1) Fixed Overhead Efficiency Variance: This is the difference between actual hours taken to complete a work and standard hours that should have been taken to complete a work and standard hours that should have been taken to complete the work.

It measures the efficiency of performance. Symbolically we can express it as

Fixed overhead efficiency variance

= Standard fixed rate of recovery X (Standard Hours– Actual hours)

of overheads for actual output

2) Fixed Overhead Calender Variance: This variance arises due to the actual time consumed, expressed in terms of hours or days as the case may be, being different from standard time that should have been taken. In other words, it is due to the difference between the number of working days in the budgeted period and the number of actual working days in the period to which the budget is applied. This variance is obtained by multiplication of the standard rate of recovery of fixed or overhead by difference between revised budgeted hours and budgeted hours.

Symbolically it can be expressed as:

Fixed Overhead Calender Variance

= Standard Rate of Recovery of fixed overheads (per hour) (Revised Budgeted Hours – Budgeted Hours)

or

= (Actual no. of working days – Standard no. of working days) X Standard rate of recovery of fixed overheads (per day)

The calendar variances arises due to the extra holidays declared to celebrate the anniversary of the firm or on the death of a national leader or any other reason. It arises only in exceptional circumstances as normal holidays are taken into account while setting the standards. When there is no change in the working days then there should be no need for a calendar variance. Generally, this variance is adverse, but sometimes it shows favourable variance where there are extra working days.

3) Fixed Overhead Capacity Variance: This variance arises due to difference between Revised Budgeted Hours and the actual hours taken multiplied by the standard rate of recovery of fixed overheads.

Symbolically we can express this as:

Fixed overhead capacity variance

= Standard rate of recovery of fixed overheads X (Actual hours – Revised Budgeted hours)

Where,

Revised Budgeted Hours = Standard hours per day X Actual no. of days

This variance arises when there is difference between utilization of plant capacity of planned and actual utilization of plant capacity. It may be due to the factors like idle time, strikes, power failure etc. This variance can be both favourable a well as unfavourable. If the actual hours worked is more than revised budgeted hours it is favourable and vice versa.

Check:

Fixed overhead volume variance

= Fixed overhead efficiency variance + Fixed overhead capacity variance + Fixed overhead calendar variance

Note: When there is no calendar variance, the calculation of capacity variance has to be modified as follows:

Capacity variance = Standard Rate of recovery of fixed overheads X (Actual hours – Budgeted Hours)

Check

Fixed overhead Volume Variance = Efficiency Variance + Capacity Variance

A) Fixed Overheads Expenditure Variance: Now his variance actually measures the difference between the expenditure that is actually incurred and the budgeted fixed overheads. It is also known as budget variance or spending variance.

Example

The following information is given to you:

Calculate the following:

1) Fixed overhead variance

2) Expenditure variance

3) Fixed overhead volume variance

4) Fixed overhead efficiency variance

5) Fixed overhead capacity variance

Solution:

Budgeted Fixed overheads

Standard rate of recovery of fixed overhead =------

Budgeted hours

$ 20,000

= ----- = $ 1

20,000

Budgeted hours

Standard hours for actual output= ------X Actual output

Budgeted output

20,000

= ------ X 10,400

10,000

= 20,800 hours

1) Fixed overhead variance =

(Std. hours for actual output X Std. fixed O.H. rate) – Actual Fixed overheads

= (20,800 hours X $ 1) – $20,400

= $ 20,800 – $ 20,400

= $ 400 (F)

2) Expenditure Variance = Budgeted F. OH – Actual F. OH

= $20,000 – 20,400

= $400 (A)

3) Fixed overhead volume variance =

Std. Recovery rate of FOH X (Std. hours for actual output – Budgeted hours)

= $ 1 X (20,800 – 20,000)

= $800 (F)

4) Fixed overhead Efficiency Variance =

Std. Recovery rate of F.OH X (Std. hours for actual output – Actual hours)

= $1 X (20,800 – 20,100)

= $700 (F)

5) Fixed overhead capacity variance =

Std. rate of recovery of F.OH X (Actual hours – Budgeted hours)

= $1 X (20,100 – 20,000)

= $1.00 (F)

Check:

Fixed O.H. Volume Variance = Efficiency Variance + Capacity Variance

$800(F) = $700(F) + $100(F)

Email Based Assignment Help in Classification of Fixed overhead volume

Following are some of the topics in Standard Costing in which we provide help: