1. Introduction and Objectives
Because fixed manufacturing overhead (FMOH) does not change with short-term volume fluctuations, analyzing its variances requires a different approach than variable costs. This lesson details the spending and volume variances used under absorption costing frameworks. 
2. Formula Architecture
  • Fixed Overhead Budget (Spending) Variance: Measures the direct deviation between actual fixed overhead costs incurred and the static budgeted benchmark.

    FMOH Spending Variance = Actual FMOH Costs Incurred − Budgeted FMOH Costs
  • Fixed Overhead Volume Variance: Measures the financial impact of operating at a different production volume than originally planned. It reflects how effectively a company utilizes its fixed plant capacity.

    FMOH Volume Variance = Budgeted FMOH Costs − Applied FMOH Costs

    Where:
    Applied FMOH Costs = Standard Hours Allowed for Actual Production × Predetermined FMOH OAR

3. Volume Variance Interpretation
If a company produces fewer units than its budgeted capacity allows, the resulting volume variance will be unfavorable. This indicates that fixed factory capacity went underutilized, causing fixed overhead costs to be spread across fewer units, which increases the average cost per unit.
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