Performance Management · Standard costing

Variable and Fixed Overhead Variances Explained

Updated 11 October 2026 · Fact-checked

Overhead variances compare actual overhead with standard overhead. Variable overhead has an expenditure and an efficiency variance. Fixed overhead has an expenditure variance and, under absorption costing, a volume variance. Volume splits into capacity (hours worked against budget) and efficiency (standard hours against hours worked). Marginal costing has no volume variance.

Understand Variable and Fixed Overhead Variances

An overhead variance tells you why the overhead cost in the accounts differs from the overhead you expected for the output achieved. You build them in the same way as labour variances, because overheads are usually absorbed using labour hours.

Variable overheads change with activity. Two things can go wrong. You may pay more or less per hour than the standard rate (the expenditure variance). Or you may use more or fewer hours than the output should have needed (the efficiency variance). The efficiency variance is simply the labour efficiency hours difference, priced at the variable overhead rate.

Fixed overheads do not change with activity, so the budget is a lump sum. The expenditure variance is the budgeted lump sum less the actual spend. Under absorption costing, each unit also absorbs a share of fixed overhead at a predetermined rate. If you make more or fewer units than budgeted, you absorb more or less than budgeted. That gap is the volume variance.

The volume variance is then split in two. The capacity variance asks whether you worked more or fewer hours than budgeted. The efficiency variance asks whether those hours produced more or fewer standard hours of output. Capacity plus efficiency always equals volume.

Under marginal costing, fixed overhead is a period cost and is not absorbed into units. So there is no volume, capacity or efficiency variance for fixed overhead. You report only the expenditure variance. This is the point examiners test most in the absorption versus marginal comparison.

Key rules to remember

Variable overhead expenditure variance: (Actual hours × standard VOH rate per hour) − Actual variable overhead cost; Positive = favourable, negative = adverse. Use the hours that the overhead is based on (usually hours worked).
Variable overhead efficiency variance: (Standard hours for actual output − Actual hours) × standard VOH rate per hour; Fewer hours than standard is favourable. Same hours difference as labour efficiency.
Fixed overhead expenditure variance: Budgeted fixed overhead − Actual fixed overhead; Actual below budget is favourable. Applies under both absorption and marginal costing.
Fixed overhead volume variance: (Actual output − Budgeted output) × standard fixed overhead per unit; Equals absorbed overhead less budgeted overhead. Absorption costing only.
Fixed overhead capacity variance: (Actual hours − Budgeted hours) × standard fixed overhead rate per hour; More hours than budget is favourable.
Fixed overhead efficiency variance: (Standard hours for actual output − Actual hours) × standard fixed overhead rate per hour; Fewer hours than standard is favourable.
Volume variance check: Volume = Capacity + Efficiency; Use this to check your arithmetic and signs.
Total fixed overhead variance: Absorbed fixed overhead − Actual fixed overhead = Expenditure + Volume; Absorbed = actual output × standard fixed overhead per unit.

How to solve Variable and Fixed Overhead Variances questions

Use the same order every time. It stops you mixing up hours, rates and outputs.

1Write out the standards: hours per unit, variable overhead rate per hour, budgeted output, budgeted fixed overhead and fixed rate per hour (per unit and per hour).
2Calculate budgeted hours (budgeted output × hours per unit) and standard hours for actual output (actual output × hours per unit).
3Note the actual hours worked, actual variable overhead and actual fixed overhead.
4Calculate the variable overhead expenditure variance, then the efficiency variance.
5Calculate the fixed overhead expenditure variance (budget less actual).
6If the question uses absorption costing, calculate the volume variance, then split it into capacity and efficiency. Check that the two parts add to volume.
7Label each answer F or A. Favourable means profit increases; adverse means profit falls.
8If the question is marginal costing, stop at the fixed expenditure variance and state that no volume variance arises.

Quickest way: Three hour figures and two rates

When to use it: Use this for Section A and OT case questions where you need one overhead variance fast.

Find three hour figures: budgeted hours, actual hours and standard hours for actual output.
Line them up in order: budgeted, actual, standard.
Capacity is actual minus budgeted, times the fixed rate. Efficiency is standard minus actual, times the rate (fixed or variable).
For favourable or adverse, ask: did we work more hours than budgeted (capacity F), and did we use fewer hours than standard (efficiency F)?
Volume is standard hours minus budgeted hours, times the fixed rate. It must equal capacity plus efficiency.

Common mistakes in Variable and Fixed Overhead Variances

Using standard hours instead of actual hours in the variable overhead expenditure variance.
Students copy the efficiency formula and forget that expenditure compares what you paid with what the hours worked should have cost.
Fix: Expenditure always uses actual hours worked × standard rate against actual cost. Efficiency is the only one using standard hours.
Calculating a fixed overhead volume variance under marginal costing.
Students apply the absorption formulas automatically.
Fix: Check the costing method first. Under marginal costing, fixed overhead is not absorbed, so only the expenditure variance exists.
Using the fixed rate per unit in the capacity and efficiency variances.
The volume variance uses the rate per unit, so students carry it over.
Fix: Capacity and efficiency are in hours, so use the rate per hour. Volume in units uses the rate per unit.
Getting the sign wrong on capacity variance.
Students reverse actual and budgeted hours.
Fix: More hours worked than budgeted means more overhead absorbed, so capacity is favourable.
Comparing fixed overhead actual cost with a flexed budget.
Variable cost logic is applied to a cost that does not change with output.
Fix: Fixed overhead is never flexed. Compare actual spend with the original budgeted lump sum.
Using budgeted hours as the base for the variable overhead efficiency variance.
Students mix up budget and standard hours.
Fix: Use standard hours for the actual output achieved, not budgeted hours.

Worked examples

Example 1

A company budgets to make 2,000 units. Each unit takes 2 standard hours. Budgeted fixed overhead is ₹8,00,000. The standard variable overhead rate is ₹50 per hour. Overheads are absorbed on labour hours. Actual results: 2,100 units made, 4,300 hours worked, variable overhead ₹2,26,000 and fixed overhead ₹8,30,000. Calculate all variable and fixed overhead variances under absorption costing.

Show the solution

Budgeted hours = 2,000 × 2 = 4,000. Standard hours for actual output = 2,100 × 2 = 4,200. Actual hours = 4,300.
Fixed rate per hour = ₹8,00,000 ÷ 4,000 = ₹200. Fixed rate per unit = ₹200 × 2 = ₹400.
Variable overhead expenditure: 4,300 × ₹50 = ₹2,15,000. Less actual ₹2,26,000 = ₹11,000 adverse.
Variable overhead efficiency: (4,200 − 4,300) × ₹50 = ₹5,000 adverse.
Fixed overhead expenditure: ₹8,00,000 − ₹8,30,000 = ₹30,000 adverse.
Fixed overhead volume: (2,100 − 2,000) × ₹400 = ₹40,000 favourable.
Capacity: (4,300 − 4,000) × ₹200 = ₹60,000 favourable. Efficiency: (4,200 − 4,300) × ₹200 = ₹20,000 adverse.
Check: ₹60,000 F − ₹20,000 A = ₹40,000 F, which equals volume. Total fixed overhead variance: absorbed ₹8,40,000 − actual ₹8,30,000 = ₹10,000 F, and ₹30,000 A + ₹40,000 F = ₹10,000 F.

Answer: Variable overhead expenditure ₹11,000 A; variable overhead efficiency ₹5,000 A; fixed overhead expenditure ₹30,000 A; volume ₹40,000 F, made up of capacity ₹60,000 F and efficiency ₹20,000 A.

Example 2

A firm budgets 500 units, each needing 4 standard hours. Budgeted fixed overhead is ₹3,00,000. Actual output was 480 units, actual hours were 2,100 and actual fixed overhead was ₹3,10,000. Calculate the fixed overhead variances under absorption costing, and state which variances would be reported under marginal costing.

Show the solution

Budgeted hours = 500 × 4 = 2,000. Standard hours for actual output = 480 × 4 = 1,920. Actual hours = 2,100.
Fixed rate per hour = ₹3,00,000 ÷ 2,000 = ₹150. Rate per unit = ₹150 × 4 = ₹600.
Expenditure: ₹3,00,000 − ₹3,10,000 = ₹10,000 adverse.
Volume: (480 − 500) × ₹600 = ₹12,000 adverse.
Capacity: (2,100 − 2,000) × ₹150 = ₹15,000 favourable.
Efficiency: (1,920 − 2,100) × ₹150 = ₹27,000 adverse.
Check: ₹15,000 F − ₹27,000 A = ₹12,000 A, which equals volume.
Total: absorbed 480 × ₹600 = ₹2,88,000, less actual ₹3,10,000 = ₹22,000 adverse, which equals ₹10,000 A + ₹12,000 A.
Under marginal costing, fixed overhead is not absorbed, so only the expenditure variance is reported.

Answer: Expenditure ₹10,000 A; volume ₹12,000 A (capacity ₹15,000 F, efficiency ₹27,000 A); total ₹22,000 A. Under marginal costing only the ₹10,000 A expenditure variance arises.

Exam tips

Always check whether the question says absorption or marginal costing before you calculate any fixed overhead variance.
In OT questions, work out the three hour figures first. Most overhead variances are then one subtraction and one multiplication.
In Section C, show the rate per hour and per unit workings clearly. Method marks are available even if one number is wrong.
Add a short comment on cause and link. For example, an adverse labour efficiency variance usually gives the same adverse variable overhead efficiency variance.
Use the check that volume equals capacity plus efficiency to catch sign errors before you move on.

Practice questions from Standard costing

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 difference between fixed overhead capacity and efficiency variances?

Capacity compares actual hours worked with budgeted hours. Efficiency compares the standard hours for actual output with actual hours worked. Both are priced at the fixed overhead rate per hour, and together they make up the volume variance.

How do you calculate the variable overhead efficiency variance?

Take standard hours for actual output, subtract actual hours worked, and multiply by the standard variable overhead rate per hour. A positive answer is favourable. A negative answer is adverse.

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

Marginal costing does not absorb fixed overhead into units. It treats fixed overhead as a period cost. So there is nothing absorbed to compare with the budget, and only the expenditure variance remains.

Is the fixed overhead volume variance a cash cost?

No. It arises from absorbing fixed overhead at a predetermined rate when output differs from budget. It shows how under- or over-absorbed the overhead was, not extra spending.