Variable & Fixed Overhead Variance

1. Variable Overhead Variance (VOH)

Concepts

• VOH Rate: Pre-determined during budgeting.
• Applied when production occurs → called Applied Variable Overhead.
• Accounting System captures actual VOH incurred.
• In between: we calculate Budgeted VOH for Actual Quantity (i.e., Standard VOH for Actual Output).

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VOH Variance Components

Type	Formula
Spending Variance	Actual VOH − Applied VOH
Efficiency Variance	Applied VOH − Budgeted VOH for actual output
Total VOH Variance	Actual VOH − Budgeted VOH for actual output

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Example: Switchgear Manufacturer

• Budgeted Output: 1000 units
• Actual Output: 1100 units
• Standard Machine Hour per Unit: 2 hrs
• Budgeted VOH Rate: Rs. 1000/hr
• Actual Machine Hours Used: 2300 hrs
• Actual VOH Incurred: Rs. 21,85,000

Calculations

1. Budgeted VOH for Actual Output =
   1100 units × 2 hrs × Rs. 1000 = Rs. 22,00,000

2. Actual VOH = Rs. 21,85,000

3. Total VOH Variance =
   21,85,000 − 22,00,000 = Rs. 15,000 Favourable

4. Applied VOH =
   2300 hrs × Rs. 1000 = Rs. 23,00,000

5. Spending Variance =
   21,85,000 − 23,00,000 = Rs. 1,15,000 Favourable

6. Efficiency Variance =
   23,00,000 − 22,00,000 = Rs. 1,00,000 Adverse

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2. Fixed Overhead Variance (FOH)

Concepts

• FOH = Costs that do not vary with output (e.g., Rent, Insurance)
• Fixed Overhead Rate = Budgeted FOH ÷ Budgeted Machine Hours
• Applied FOH = Fixed OH Rate × Actual Machine Hours
• Applied FOH is an accounting allocation, not real spending

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FOH Variance Components

Type	Formula
Spending Variance	Actual FOH − Budgeted FOH
Volume Variance	Applied FOH − Budgeted FOH
Total FOH Variance	Actual FOH − Applied FOH

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Example: Switchgear Manufacturer

• Budgeted FOH = Rs. 13,20,000
• Budgeted Machine Hours = 2200 hrs
• Fixed OH Rate = Rs. 600/hr
• Actual Machine Hours = 2300 hrs
• Actual FOH = Rs. 14,00,000

Calculations

1. Applied FOH =
   2300 hrs × Rs. 600 = Rs. 13,80,000

2. FOH Volume Variance =
   13,80,000 − 13,20,000 = Rs. 60,000 Favourable

3. FOH Spending Variance =
   14,00,000 − 13,20,000 = Rs. 80,000 Adverse

4. Total FOH Variance =
   14,00,000 − 13,80,000 = Rs. 20,000 Adverse

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3. Interpretation of Volume Variance

• Favourable Volume Variance may indicate:
  • Increased production: Fixed cost per unit reduces → good.
  • Same output but higher hours: inefficiency → not good.

⚠️ Volume variance should be interpreted in the context of productivity and output.

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4. Summary Table

Type of Overhead Variance	Formula
VOH Spending Variance	Actual VOH − Applied VOH
VOH Efficiency Variance	Applied VOH − Budgeted VOH for actual output
VOH Total Variance	Actual VOH − Budgeted VOH for actual output
FOH Spending Variance	Actual FOH − Budgeted FOH
FOH Volume Variance	Applied FOH − Budgeted FOH
FOH Total Variance	Actual FOH − Applied FOH

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