1. Fixed Overhead Treatment in Standard Costing
Under full absorption costing, fixed manufacturing overheads (e.g., factory rent, building depreciation) are assigned to products using a predetermined Fixed Overhead Absorption Rate (FOAR) based on planned capacity levels:
“FOAR” = “Total Budgeted Fixed Overhead Cost”/”Budgeted Capacity Base Hours (or Units)”
 
2. Mathematical Formulas and Core Logic
  • Fixed Overhead Expenditure Variance: The simplest variance in this suite. It compares total actual fixed cash spending directly against total budgeted fixed overheads.

“FOH Expenditure Variance” = “Budgeted Fixed Overheads” − “Actual Fixed Overheads”

 

  • Fixed Overhead Volume Variance: Measures the financial impact of producing a different number of units than planned. It tracks the over- or under-absorption of fixed costs caused by capacity changes.

“FOH Volume Variance” =(“Actual Production Volume Units” − “Budgeted Production Volume Units”)× “Standard Fixed Overhead Cost per Unit”
 
3. Breaking Down the Volume Variance
To gain deeper insights, management accountants split the volume variance into two sub-categories:
  • FOH Capacity Variance: Tracks whether the factory operated for more or fewer hours than planned: * (Actual Hours Worked – Budgeted Hours) × FOAR*.
  • FOH Efficiency Variance: Tracks the speed of production during those active hours: (Standard Hours Allowed for Actual Output – Actual Hours Worked) × FOAR.
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