Fixed Overhead Total Variance: Definition, Formula, Explanation, And Illustration

Definition:

A fixed overhead total variance is the difference between the actual fixed overheads that were incurred and the fixed overheads that were absorbed during the year.

Fixed overhead total variance is constituted of fixed overhead expenditure variance and fixed overhead volume variance.

Absorbing or flexing fixed overheads means the allocation of fixed production overheads to the actual output produced by the company.

Formula:

Fixed overhead total variance = Flexed fixed overheads – Actual fixed overheads

Flexed/Absorbed fixed overheads can be calculated through the following formula:

Actual units produced * fixed overhead absorption rate

Explanation:

Variance analysis is the process of comparing the budgeted and actual costs and revenues. It helps us minimize costs to the minimum so that maximum profit can be earned.

Similarly, a fixed overhead variance helps us scrutinize areas where fixed overheads incurred by the company could be reduced.

It also assists in pointing out any significant increase in fixed costs indicating a potential fraud or financial crisis.

It also assists in pointing out any significant increase in fixed costs indicating a potential fraud or financial crisis.

Fixed overheads are manufacturing costs that do not vary as output varies. These are costs that must be paid even if no output is produced like factory rent, depreciation expense and salaries of factory supervisors.

A fixed overhead total variance would signify how the factory rent or depreciation expense varied from the budgeted expense.

It represents the difference between the absorbed or flexed overheads and the actual overheads that have been incurred i.e. the fixed overhead that has been recovered versus the actual fixed overhead.

See also  Direct Material Usage Variance: Definition, Formula, Explanation, Analysis, And Example

A fixed overhead total variance is an important part of variance analysis as discussed above and constitutes of two more variances:

  • Fixed overhead volume variance
  • Fixed overhead expenditure variance

It can also be represented as follows:

Fixed overhead total variance = Fixed overhead volume variance + Fixed overhead expenditure variance

The fixed overhead volume variance computes the fixed overheads that have been recovered (under absorbed or over absorbed) due to a change in number of units produced.

The fixed overhead expenditure variance is a distinction between actual fixed overheads and the budgeted fixed overheads.

Illustration of the fixed overhead total variance:

Aamreli steels is a manufacturing company that has a budgeted fixed overhead expense and output of $5,000,000 and 500,000 units respectively for the year ended 2019.

However, the total fixed overheads actually incurred were $4,500,000 and the actual output was of 550,000 units. Calculate the fixed overhead total variance.

Step 1: Calculate the fixed overhead absorption rate (FOAH)

(5,000,000/500,000) = $10 per unit

Step 2: Calculated the absorbed/flexed overheads by multiplying FOAH and actual output

10 * 550,000 = $ 5,500,000

Step 3: Use the formula given above to calculate the fixed overhead total variance

$5,500,000 – $4,500,000 = $1,000,000 Aamreli steels has a fixed overhead total variance of $1,000,000 for the year ended 2019. It means that Aamreli steels has over absorbed overheads of $1,000,000.

In other words, costs have been inflated and Aamreli steels has an over-recovery of overheads. It may be due to over time work of employees or expenses being cheaper than expected.

Scroll to Top