 Article byNiti Gupta ## What is Fixed Overhead Volume Variance?

Fixed overhead volume variance refers to the difference arising between the budgeted fixed overheads and the actual overheads applied to the units produced during an accounting period. The value of variance reflects the over or under absorption of fixed overheads and it arises due to change in the quantum of production against the budgeted quantum of production.

### Explanation

Companies arrive at a figure of budgeted fixed overheads based on their expected level of production. Based on budgeted fixed overheads, an absorption rate is calculated for applying the same to the actual production. Recovery of fixed overheads can be made by including the same in cost per unit. The absorption rate per unit is calculated by dividing the budgeted fixed overheads by the budgeted production units. The same is termed as “Standard Fixed Overhead Rate.”

The actual product might be different, and therefore, it leads to a difference in the total fixed overheads absorbed or applied to the actual production and the budgeted fixed overheads. Thus, the variance is created due to variance in the actual production against the budgeted production.

### Formula

It can be calculated using the following formula:

For eg:
Source: Fixed Overhead Volume Variance (wallstreetmojo.com)

Here,

The formula suggests that the difference between budgeted fixed overheads and applied fixed overheads reflects fixed overhead volume variance. Also, there can be other bases for the allocation of fixed overheads apart from production units. These allocation bases can include direct labor hours, machine hours, and so on. The standard fixed overhead and the applied fixed overheads with be calculated based on such allocation base.

### Interpretation

It can either be positive or negative. When the same is positive, it reflects favorable variance, and when the variance is negative, it reflects unfavorable variance.

#### Unfavorable Variance

In the example that we took, the variance was a negative figure, i.e. (\$10,000). This means that the budgeted fixed overheads exceeded the applied fixed overheads. This reflects that the actual production has been less than the budgeted production, suggesting that the company is underutilizing its production facilities. This gives rise to unfavorable variance.

#### Favorable Variance

Fixed overhead volume variance is positive when the applied fixed overheads exceed budgeted fixed overheads. This indicates that the company has over-utilized its production facilities by producing many units with the available resources. This represents a favorable condition for the company.

### Causes

There can be various causes, which are as follows: