Management Accounting · Reconciliation of budgeted and actual profit

Variable and Fixed Overhead Variances Explained

Updated 11 October 2026 · Fact-checked

Overhead variances compare actual overhead cost with standard. Variable overhead has an expenditure variance (actual cost against actual hours × standard rate) and an efficiency variance (hours saved or wasted × standard rate). Fixed overhead has an expenditure variance: budgeted fixed overhead minus actual fixed overhead. In marginal costing, that is the only fixed overhead variance.

Understand Variable and Fixed Overhead Variances

Overheads are indirect costs. In standard costing, each unit has a standard amount of overhead, usually based on a standard number of labour hours (or machine hours). Variances show why actual overhead differs from the standard allowed for the output produced.

Variable overheads change with activity. Think of power, or consumables. There are two variances. The expenditure variance asks: did we pay more or less than expected for the hours we actually worked? The efficiency variance asks: did we use more or fewer hours than the standard for the output? The efficiency variance is driven by labour efficiency, so it has the same cause as the labour efficiency variance.

Fixed overheads do not change with activity within the relevant range. The fixed overhead expenditure variance is simply the budgeted fixed overhead minus the actual fixed overhead. It is adverse if you spent more than budget.

The treatment of fixed overheads depends on the costing method. Under marginal costing, fixed overheads are a period cost. They are not absorbed into units, so the only fixed overhead variance is expenditure. Under absorption costing, fixed overheads are absorbed at a predetermined rate per unit or hour. This also creates a fixed overhead volume variance (with capacity and efficiency parts). At this level, focus on the expenditure variance and know that absorption costing adds volume effects.

Key contrast: variable overhead variances use actual hours and standard rates. Fixed overhead expenditure ignores activity entirely. It compares two cash amounts, budget and actual.

Key formulas to remember

Variable overhead expenditure variance: (Actual hours × standard rate per hour) − actual variable overhead cost; Positive = favourable, negative = adverse. Use hours actually worked (or actual hours for the base used).
Variable overhead efficiency variance: (Standard hours for actual output − actual hours) × standard variable overhead rate per hour; Favourable if actual hours are fewer than standard hours allowed.
Fixed overhead expenditure variance: Budgeted fixed overhead − actual fixed overhead; Favourable if actual spend is below budget. Applies in both marginal and absorption costing.
Standard hours for actual output: Actual units produced × standard hours per unit; Always based on output produced, not budgeted output.
Fixed overhead absorption rate: Budgeted fixed overhead ÷ budgeted activity (units or hours); Used only in absorption costing. It gives the fixed overhead absorbed into each unit or hour.

How to solve Variable and Fixed Overhead Variances questions

Use this method for any overhead variance question. Decide first whether the overhead is variable or fixed.

1Identify the overhead type: variable or fixed, and the costing method (marginal or absorption).
2Write down the standard rate per hour and the standard hours per unit from the cost card.
3Calculate standard hours for actual output: actual units × standard hours per unit.
4For variable overhead efficiency, compare standard hours with actual hours and multiply the difference by the standard rate.
5For variable overhead expenditure, multiply actual hours by the standard rate and subtract actual cost.
6For fixed overhead expenditure, subtract actual fixed cost from budgeted fixed cost.
7Label each result favourable (F) or adverse (A), then check that the variances add up to the total difference.

Quickest way: Three-line overhead check

When to use it: Use this in Section A number entry or multiple choice questions when time is short.

Variable expenditure: actual hours × rate gives what it should have cost; compare with the actual cost. Lower actual cost = F.
Variable efficiency: fewer actual hours than standard hours = F. Multiply the hour gap by the rate.
Fixed expenditure: budget minus actual. Spending less than budget = F.
Do a sense check: if labour efficiency is adverse, variable overhead efficiency should also be adverse when the same hours are used.

Common mistakes in Variable and Fixed Overhead Variances

Using standard hours instead of actual hours in the variable overhead expenditure variance.
Students mix it up with the efficiency variance, which does use standard hours.
Fix: Expenditure = actual hours × standard rate versus actual cost. Efficiency is the only one that compares standard and actual hours.
Using budgeted output to find standard hours.
The budget figure is given prominently in the question.
Fix: Always use actual units produced × standard hours per unit for variable overhead efficiency.
Getting the sign wrong on fixed overhead expenditure.
Students subtract budget from actual, as with other cost variances written the other way.
Fix: Write budget − actual. Then ask: did we spend more than budget? If yes, it is adverse.
Flexing fixed overhead budget for actual output.
Students treat all overheads like variable ones.
Fix: Fixed overhead budget does not flex. Compare the original budgeted fixed cost with actual.
Calculating a fixed overhead efficiency variance under marginal costing.
Students apply absorption costing variances automatically.
Fix: Under marginal costing, fixed overheads are not absorbed, so there is only the expenditure variance. Check the costing method in the question.
Forgetting to label variances F or A.
Students stop once they have a number.
Fix: State the direction every time. In number entry questions, check whether the answer needs a sign or a label.

Worked examples

Example 1

A company uses standard costing. The standard variable overhead is $4 per labour hour, and each unit takes 3 standard hours. In May, 2,000 units were made using 6,300 labour hours. Actual variable overhead cost was $26,000. Calculate the variable overhead expenditure and efficiency variances.

Show the solution

Standard hours for actual output = 2,000 × 3 = 6,000 hours.
Expenditure: actual hours × standard rate = 6,300 × $4 = $25,200.
Actual cost = $26,000, so expenditure variance = $25,200 − $26,000 = $800 adverse.
Efficiency: (6,000 − 6,300) × $4 = −300 × $4 = $1,200 adverse.
Total variable overhead variance = $800 + $1,200 = $2,000 adverse. Check: standard cost for output = 6,000 × $4 = $24,000; actual = $26,000; difference $2,000 adverse.

Answer: Variable overhead expenditure variance $800 adverse; efficiency variance $1,200 adverse.

Example 2

Budgeted fixed overheads were $90,000 for the month, based on budgeted output of 18,000 units. Actual output was 19,500 units and actual fixed overheads were $87,400. Calculate the fixed overhead expenditure variance and state what it would be under marginal costing.

Show the solution

Fixed overhead expenditure variance = budgeted fixed overhead − actual fixed overhead.
= $90,000 − $87,400 = $2,600.
Actual spend is below budget, so the variance is favourable.
Output differs from budget, but this does not change the expenditure variance. The budget is not flexed for fixed costs.
Under marginal costing the fixed overhead is a period cost, and the expenditure variance is the same $2,600 favourable. No volume variance arises.

Answer: Fixed overhead expenditure variance is $2,600 favourable, in both marginal and absorption costing.

Exam tips

Read the question for the costing method. Marginal costing means fixed overhead expenditure is the only fixed overhead variance.
In Section A, work out standard hours for actual output first. It is needed for efficiency and is easy to get wrong under time pressure.
For multiple response questions, check each statement against the sign: spending below budget or using fewer hours is favourable.
Link overhead efficiency to labour efficiency. If the question says the same hours base is used, the causes are the same.
In Section B operating statements, enter variable and fixed overhead variances with the correct F or A, and check they reconcile to the profit difference.

Practice questions from Reconciliation of budgeted and actual profit

Variable and Fixed Overhead Variances in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Variable and Fixed Overhead Variances: frequently asked questions

What is the formula for the variable overhead expenditure variance?

It is (actual hours × standard variable overhead rate per hour) − actual variable overhead cost. A positive answer is favourable and a negative answer is adverse.

Why does the variable overhead efficiency variance use the labour hours?

Variable overhead is usually absorbed on labour hours. If workers take more hours than the standard, more variable overhead is absorbed than planned. So the variance follows labour efficiency.

Is the fixed overhead expenditure variance flexed for output?

No. Fixed overhead does not change with activity, so you compare the original budget with actual cost. Output does not affect this variance.

What is the difference between variable and fixed overhead variances?

Variable overhead has expenditure and efficiency variances, both linked to actual hours. Fixed overhead has an expenditure variance comparing budget with actual spend. Under absorption costing it also has volume variances.