Strategic Cost Management · Variance Analyses

Overhead Cost Variances: Fixed and Variable Overhead Formulas

Updated 11 October 2026 · Fact-checked

Overhead cost variances compare standard overhead absorbed with actual overhead incurred and split the gap into causes. Variable overhead has expenditure and efficiency variances. Fixed overhead has expenditure and volume variances; volume splits into efficiency, capacity and calendar. Find the standard rate, compute each variance, check the totals and mark F or A.

Understand Overhead Cost Variances

Overheads are absorbed into products at a standard rate. At the end of the period, the overhead absorbed seldom equals the overhead actually incurred. Overhead variances explain why, and tell you who should act on each reason.

Variable overhead moves with activity. It has two variances. The expenditure variance asks whether you paid more or less per hour than the standard. The efficiency variance asks whether you used more or fewer hours than the standard for the actual output.

Fixed overhead does not move with activity within the relevant range, so the budget is a fixed sum. The expenditure variance is the difference between budgeted and actual fixed overhead. The volume variance is the difference between overhead absorbed on actual output and budgeted overhead. It arises because you produced more or less than budgeted.

The volume variance is split into three causes. Efficiency: workers took more or fewer hours than the standard for actual output. Capacity: the hours actually worked differ from the budgeted hours. Calendar: the number of working days differs from the budgeted days. The calendar variance is shown separately only when the question gives actual and budgeted days.

A variance is favourable (F) when it increases profit and adverse (A) when it reduces profit. For overheads, over-absorption is favourable and under-absorption is adverse. Higher actual spending than budget is adverse.

Key rules to remember

Standard variable overhead rate: Budgeted variable overhead ÷ Budgeted hours (or units); Use hours if the question bases absorption on hours; use units if it bases on output.
Standard fixed overhead rate: Budgeted fixed overhead ÷ Budgeted hours (or units); Use the same base as the variable rate unless told otherwise.
Variable overhead total variance: (Standard hours for actual output × Standard rate) − Actual variable overhead; Positive is favourable. Equals expenditure plus efficiency variance.
Variable overhead expenditure variance: (Actual hours × Standard rate) − Actual variable overhead; Positive is favourable.
Variable overhead efficiency variance: (Standard hours for actual output − Actual hours) × Standard variable rate; Positive is favourable.
Fixed overhead total variance: (Standard hours for actual output × Standard fixed rate) − Actual fixed overhead; Equals expenditure plus volume variance.
Fixed overhead expenditure variance: Budgeted fixed overhead − Actual fixed overhead; Positive is favourable.
Fixed overhead volume variance: (Standard hours for actual output × Standard fixed rate) − Budgeted fixed overhead; Equivalent to (Actual output − Budgeted output) × Standard rate per unit.
Fixed overhead efficiency variance: (Standard hours for actual output − Actual hours) × Standard fixed rate; Positive is favourable.
Fixed overhead capacity variance: (Actual hours − Revised budgeted hours) × Standard fixed rate; Revised budgeted hours = budgeted hours × actual days ÷ budgeted days. If no calendar data is given, use budgeted hours.
Fixed overhead calendar variance: (Revised budgeted hours − Budgeted hours) × Standard fixed rate; Favourable if more working days than budget.
Volume variance check: Volume = Efficiency + Capacity + Calendar; Use this to verify your workings.

How to solve Overhead Cost Variances questions

Follow this order for any overhead variance question. It keeps the workings clean and lets you check totals.

1List the data: budgeted output, hours, days and overheads (variable and fixed), then actual output, hours, days and overheads.
2Compute the standard rates for variable and fixed overhead on the base the question uses (hours or units).
3Compute standard hours for actual output: actual output × standard hours per unit.
4If days are given, compute revised budgeted hours = budgeted hours × actual days ÷ budgeted days.
5Calculate each variance with the formula, writing the quantities explicitly, and mark F or A.
6Add up the sub-variances and check them against the total variance. Check that volume = efficiency + capacity + calendar.
7Write a one-line reason for the large variances and name who should act, if the question asks for comment.

Quickest way: Three-line absorption comparison

When to use it: Use when the question gives hours and fixed overhead and you need all fixed overhead variances quickly.

Write four amounts in a row: Actual fixed overhead; Budgeted fixed overhead; Revised budget (actual hours × standard rate is a separate line below); Absorbed overhead (standard hours for actual output × rate).
Also write actual hours × rate and revised budgeted hours × rate.
Take successive differences: Budget − Actual is expenditure; Revised budgeted hours × rate − Budget is calendar; Actual hours × rate − Revised budgeted hours × rate is capacity; Absorbed − Actual hours × rate is efficiency.
The three volume parts must add to Absorbed − Budget. If not, recheck the hours.

Common mistakes in Overhead Cost Variances

Using actual hours instead of standard hours for actual output when computing absorbed overhead.
Students forget that absorption follows output, not time spent.
Fix: Always compute standard hours for actual output first: actual units × standard hours per unit.
Mixing up the sign convention for fixed overhead expenditure variance.
Material and labour formulas use standard minus actual, and students reverse it here.
Fix: Use Budgeted − Actual. If you spent less than budget, it is favourable.
Using the budgeted fixed overhead rate for variable overhead or vice versa.
Both rates are on the same base and look alike in the data.
Fix: Compute the two rates separately and label them before you start.
Calculating the capacity variance against budgeted hours when days differ.
The calendar variance is skipped.
Fix: If working days are given, compare actual hours with revised budgeted hours, and show calendar separately.
Calling the volume variance a spending variance.
The word variance suggests cost overspend.
Fix: The volume variance arises from output, not spending. Only expenditure variance relates to money spent.
Applying the efficiency variance to fixed overhead as if fixed cost changed with hours.
Students think fixed overhead cannot have efficiency variance.
Fix: Fixed cost is not changed by hours, but absorbed overhead is. The efficiency variance measures the effect of hours on absorption.

Worked examples

Example 1

A company budgets variable overhead of ₹2,40,000 for 12,000 labour hours. For the month, actual output needed 11,000 standard hours. Actual hours worked were 11,500 and actual variable overhead was ₹2,35,000. Compute the variable overhead variances.

Show the solution

Standard variable overhead rate = ₹2,40,000 ÷ 12,000 = ₹20 per hour.
Absorbed overhead = 11,000 × ₹20 = ₹2,20,000.
Total variance = ₹2,20,000 − ₹2,35,000 = ₹15,000 (A).
Expenditure variance = (11,500 × ₹20) − ₹2,35,000 = ₹2,30,000 − ₹2,35,000 = ₹5,000 (A).
Efficiency variance = (11,000 − 11,500) × ₹20 = ₹10,000 (A).
Check: ₹5,000 + ₹10,000 = ₹15,000 (A).

Answer: Variable overhead expenditure variance ₹5,000 (A); efficiency variance ₹10,000 (A); total ₹15,000 (A).

Example 2

Budget for a month: 25 working days, output 5,000 units, 10,000 hours, fixed overhead ₹5,00,000. Actual: 26 working days, output 5,100 units, 10,400 hours, fixed overhead ₹5,10,000. Standard time is 2 hours per unit. Compute the fixed overhead variances.

Show the solution

Standard fixed rate = ₹5,00,000 ÷ 10,000 = ₹50 per hour (₹100 per unit).
Standard hours for actual output = 5,100 × 2 = 10,200.
Absorbed overhead = 10,200 × ₹50 = ₹5,10,000.
Total variance = ₹5,10,000 − ₹5,10,000 = Nil.
Expenditure variance = ₹5,00,000 − ₹5,10,000 = ₹10,000 (A).
Volume variance = ₹5,10,000 − ₹5,00,000 = ₹10,000 (F).
Revised budgeted hours = 10,000 × 26 ÷ 25 = 10,400.
Calendar variance = (10,400 − 10,000) × ₹50 = ₹20,000 (F).
Capacity variance = (10,400 − 10,400) × ₹50 = Nil.
Efficiency variance = (10,200 − 10,400) × ₹50 = ₹10,000 (A).
Check: ₹20,000 (F) + Nil − ₹10,000 (A) = ₹10,000 (F) = volume variance.

Answer: Expenditure ₹10,000 (A); volume ₹10,000 (F), made up of calendar ₹20,000 (F), capacity Nil and efficiency ₹10,000 (A); total variance Nil.

Exam tips

Write the rate and the standard hours for actual output first. Most marks in a numerical depend on these two figures.
Mark every variance F or A. Examiners deduct marks for unlabelled answers.
Always run the check: expenditure + volume = total, and efficiency + capacity + calendar = volume.
In MCQs, read whether the base is hours or units before using a rate. Using the wrong base is a common trap.
In descriptive parts, give a reason and the responsible department, for example idle machines point to production or sales shortfall.

Practice questions from Variance Analyses

Overhead Cost Variances in other exams

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

Overhead Cost Variances: frequently asked questions

What is the difference between overhead volume variance and expenditure variance?

The expenditure variance compares budgeted fixed overhead with actual fixed overhead, so it shows over- or under-spending. The volume variance compares absorbed overhead with budgeted overhead, so it shows the effect of producing more or less than budget.

How is the fixed overhead capacity variance different from the calendar variance?

The capacity variance compares actual hours worked with revised budgeted hours, showing how well the available capacity was used. The calendar variance compares revised budgeted hours with budgeted hours, showing the effect of having more or fewer working days than planned.

Does variable overhead have a volume variance?

No. Variable overhead absorbed moves with activity, so there is no volume variance. It has only expenditure and efficiency variances.

When do I compute the calendar variance?

Compute it only when the question gives budgeted and actual working days. If it gives no day data, the volume variance splits into efficiency and capacity only.