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Management Accounting · Variance calculations and analysis

Fixed Overhead Variances: Expenditure and Volume

Updated 11 October 2026 · Fact-checked

The fixed overhead expenditure variance is budgeted fixed overhead minus actual fixed overhead. Under absorption costing, the volume variance is (actual output − budgeted output) × standard fixed overhead absorption rate per unit. Under marginal costing there is no volume variance, because fixed overheads are not absorbed into units.

Understand Fixed Overhead Variances

A fixed overhead is a cost that does not change with output in the short run, such as rent or factory insurance. Because it does not change, the budget for it is one figure. It is not flexed.

The fixed overhead expenditure variance compares that budget with what you actually spent. If you spent less than budgeted, the variance is favourable (F). If you spent more, it is adverse (A). This is the only fixed overhead variance under marginal costing.

Under absorption costing, each unit made absorbs a standard amount of fixed overhead. This is the standard fixed overhead absorption rate per unit, set as budgeted fixed overhead ÷ budgeted output. If you make more units than budgeted, you absorb more overhead than you planned to spend. The fixed overhead volume variance measures this. It is favourable if actual output is above budget and adverse if below.

The total of the two variances equals the under- or over-absorbed fixed overhead. Total fixed overhead variance = fixed overhead absorbed − actual fixed overhead. Absorbed overhead is actual output × standard rate per unit.

In marginal costing, fixed costs are written off as a period cost at the actual amount incurred. The expenditure variance compares this actual cost with the budget, and it is the only fixed overhead variance reported. Be ready for MCQs asking which variances exist under each method.

Key formulas to remember

Fixed overhead expenditure variance
Budgeted fixed overhead − Actual fixed overhead
Positive = favourable (F). Negative = adverse (A). Used under both absorption and marginal costing.
Standard fixed overhead absorption rate per unit
Budgeted fixed overhead ÷ Budgeted output (units)
If the question gives budgeted hours, the rate can be per hour instead.
Fixed overhead volume variance (absorption costing)
(Actual output − Budgeted output) × Standard fixed overhead rate per unit
Actual output above budget = favourable (F). Below budget = adverse (A). Not used in marginal costing.
Total fixed overhead variance
(Actual output × Standard rate per unit) − Actual fixed overhead
Equals expenditure variance + volume variance, taking account of F or A signs.
Marginal costing rule
Fixed overhead variance = expenditure variance only
Fixed overhead is not absorbed, so there is no volume variance.

How to solve Fixed Overhead Variances questions

Use the same order every time so you do not mix up budgeted and actual figures.

  1. 1Read whether the question says absorption costing or marginal costing. This decides whether a volume variance exists.
  2. 2List the budgeted fixed overhead, budgeted output, actual fixed overhead and actual output.
  3. 3Calculate the expenditure variance: budgeted fixed overhead minus actual fixed overhead. Label it F or A.
  4. 4If absorption costing, calculate the standard rate per unit: budgeted fixed overhead ÷ budgeted output.
  5. 5Calculate the volume variance: (actual output − budgeted output) × standard rate. Label it F or A.
  6. 6Check your answer: expenditure + volume should equal absorbed overhead minus actual overhead.
  7. 7Give the answer in the form requested, such as number entry with F or A, or a choice of options.

Quickest way: Budget-first shortcut

When to use it: Use this for number entry or multiple choice questions when the figures are simple and time is short.

  1. Expenditure: compare the two fixed overhead totals. Lower actual spend means F.
  2. If the question says marginal costing, stop after the expenditure variance. There is no volume variance.
  3. Volume (absorption costing only): compare actual units with budgeted units. More units means F.
  4. Under absorption costing only, multiply the unit difference by budgeted fixed overhead ÷ budgeted units. If the rate is given per hour, use the hourly rate and the difference in standard hours instead.
  5. Sense-check the sign before you enter the answer.

Common mistakes in Fixed Overhead Variances

  • Calculating a volume variance under marginal costing

    Students apply the absorption formula without checking the costing method.

    Fix: Check the costing method first. Marginal costing has only the expenditure variance for fixed overheads.

  • Flexing the fixed overhead budget for actual output

    Students copy the method used for variable overheads.

    Fix: Fixed overhead budget stays the same at any activity level. Compare it directly with actual spend.

  • Reversing the sign of the expenditure variance

    Students use actual minus budget, which gives the favourable direction for revenue but not for costs.

    Fix: For costs, remember: spending less than budget is favourable. Use budget minus actual.

  • Using actual output in the rate calculation

    Students confuse the standard rate with an actual rate.

    Fix: The standard rate always uses budgeted fixed overhead and budgeted output.

  • Using the volume difference in the wrong direction

    Students think higher production means higher cost, so adverse.

    Fix: Higher output absorbs more overhead, which is favourable. Lower output is adverse.

Worked examples

Example 1

A company budgeted fixed overheads of $60,000 and output of 12,000 units. Actual fixed overheads were $63,500 and actual output was 11,000 units. Calculate the fixed overhead expenditure and volume variances under absorption costing.

Show the solution
  1. Expenditure variance = $60,000 − $63,500 = $3,500 adverse.
  2. Standard rate per unit = $60,000 ÷ 12,000 = $5.
  3. Volume variance = (11,000 − 12,000) × $5 = $5,000 adverse.
  4. Check: absorbed overhead = 11,000 × $5 = $55,000. Total variance = $55,000 − $63,500 = $8,500 adverse.
  5. Expenditure $3,500 A + volume $5,000 A = $8,500 A. This matches.

Answer: Expenditure variance $3,500 adverse; volume variance $5,000 adverse.

Example 2

A firm budgets fixed overheads of $90,000 for 18,000 units. It actually makes 19,500 units and spends $88,000 on fixed overheads. Which fixed overhead variances arise under marginal costing, and what is the total fixed overhead variance under absorption costing?

Show the solution
  1. Under marginal costing only the expenditure variance applies.
  2. Expenditure variance = $90,000 − $88,000 = $2,000 favourable.
  3. Under absorption costing, standard rate = $90,000 ÷ 18,000 = $5 per unit.
  4. Volume variance = (19,500 − 18,000) × $5 = $7,500 favourable.
  5. Total variance = $2,000 F + $7,500 F = $9,500 F.
  6. Check: absorbed = 19,500 × $5 = $97,500. $97,500 − $88,000 = $9,500 F.

Answer: Marginal costing: expenditure variance of $2,000 favourable only. Absorption costing: total fixed overhead variance of $9,500 favourable.

Exam tips

  • Look for the words absorption or marginal costing before you calculate anything. Many MCQs test only this.
  • In multiple response questions, select exactly the number of options the question asks for. Remember that fixed overheads have no volume variance under marginal costing.
  • In number entry questions, check whether you must enter F or A, or only a positive figure. Follow the instructions in the question.
  • Do the check: expenditure + volume = absorbed overhead − actual overhead. It takes seconds and catches sign errors.
  • Section B operating statement questions may use fixed overhead variances. Keep the F and A labels with every figure.

Practice questions from Variance calculations and analysis

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.

Fixed Overhead Variances: frequently asked questions

What is the formula for the fixed overhead expenditure variance?

It is budgeted fixed overhead minus actual fixed overhead. A positive result is favourable and a negative result is adverse. It applies under both absorption and marginal costing.

Why is there no fixed overhead volume variance in marginal costing?

Marginal costing does not absorb fixed overheads into units. Fixed costs are charged to the period at the actual amount incurred. With no absorption, there is no volume effect to measure.

What does an adverse fixed overhead volume variance mean?

Actual output was below budgeted output, so less fixed overhead was absorbed than planned. It does not mean spending was higher. Spending is shown in the expenditure variance.

Do I use hours or units for the fixed overhead rate?

Use whichever basis the question gives for the standard absorption rate. In this guide the rate is per unit. If the rate is per hour, use budgeted hours and standard hours for actual output.