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Management Accounting · Standard Costing and Variance Analysis (Management Accounting)

Fixed Overhead Variances: Formulas and Problems

Updated 10 October 2026 · Fact-checked

Fixed overhead variance is the difference between fixed overhead absorbed on actual output and actual fixed overhead incurred. Split it into expenditure variance (budgeted less actual) and volume variance (absorbed less budgeted). Volume splits further into efficiency, capacity and calendar variances. Work in hours, using the standard rate per hour, and mark each result favourable or adverse.

Understand Fixed Overhead Variances

Fixed overhead does not change with output in the short run. Rent, supervisors' salaries and depreciation stay the same whether you make 8,000 units or 12,000. Even so, we absorb it into product cost at a standard rate, set before the period as budgeted fixed overhead ÷ budgeted output (or budgeted hours).

This creates two separate questions. First, did we spend what we planned? That is the expenditure variance. Second, did we produce and use the capacity we planned, so that the overhead was fully recovered in product cost? That is the volume variance.

The fixed overhead cost variance is the total of the two. It equals fixed overhead absorbed on actual output minus actual fixed overhead. If absorbed is more than actual, the variance is favourable. If it is less, the variance is adverse.

The volume variance can be split to show why output differed from budget. Efficiency variance: workers took more or fewer hours than the standard for actual output. Capacity variance: the hours actually worked were more or fewer than the hours available. Calendar variance: the period had more or fewer working days than budgeted. The three always add up to the volume variance.

Note that fixed overhead has no price or usage split like material does. Expenditure is the only 'spending' variance. Everything else is about how well the plant was used.

Key rules to remember

Standard fixed overhead rate
Per unit = Budgeted fixed overhead ÷ Budgeted output; Per hour = Budgeted fixed overhead ÷ Budgeted hours
Use the per-hour rate when you need efficiency, capacity and calendar variances.
Absorbed (standard) fixed overhead
Actual output × Standard rate per unit = Standard hours for actual output × Standard rate per hour
This is the amount charged to production at standard.
Fixed overhead cost variance
Absorbed fixed overhead − Actual fixed overhead
Positive is favourable, negative is adverse. It equals expenditure variance + volume variance.
Expenditure variance
Budgeted fixed overhead − Actual fixed overhead
Compares spending with the budget. Output does not affect it.
Volume variance
Absorbed fixed overhead − Budgeted fixed overhead
Equals Standard rate per unit × (Actual output − Budgeted output).
Efficiency variance
Standard rate per hour × (Standard hours for actual output − Actual hours worked)
Favourable when actual hours are fewer than standard hours for the output.
Capacity variance
Standard rate per hour × (Actual hours worked − Revised budgeted hours)
Revised budgeted hours = Budgeted hours × Actual days ÷ Budgeted days. With no calendar split, use budgeted hours instead.
Calendar variance
Standard rate per hour × (Revised budgeted hours − Budgeted hours)
Same as standard rate per day × (Actual days − Budgeted days). Favourable when more days are worked.
Volume variance check
Volume = Efficiency + Capacity + Calendar
Use this to check your arithmetic. Also Cost = Expenditure + Volume.

How to solve Fixed Overhead Variances questions

Use this order for any fixed overhead question. It keeps the signs consistent and gives you a built-in check.

  1. 1List the budget data (output, hours, days, fixed overhead) and the actual data (output, hours, days, fixed overhead) in two columns.
  2. 2Compute the standard rate per hour and per unit from the budget.
  3. 3Compute absorbed fixed overhead: actual output × rate per unit.
  4. 4Find the cost, expenditure and volume variances. Mark each F (favourable) or A (adverse).
  5. 5If hours are given, find standard hours for actual output, then efficiency and capacity variances. Find revised budgeted hours and the calendar variance only if days are given.
  6. 6Check that efficiency + capacity + calendar = volume, and expenditure + volume = cost.
  7. 7Write a one-line interpretation for each major variance, for example: 'Adverse capacity variance shows idle capacity.'

Quickest way: Five-line ladder

When to use it: Use when the question gives hours and asks for several sub-variances. It saves time and avoids formula mix-ups.

  1. Write five values down a column: Actual fixed overhead, Budgeted fixed overhead, Standard rate × Revised budgeted hours, Standard rate × Actual hours, Absorbed fixed overhead.
  2. If no days are given, skip the third line, as revised budgeted hours equal budgeted hours.
  3. Each difference between neighbouring lines is one variance: expenditure, calendar, capacity, efficiency.
  4. For each gap, the rule is: higher on the 'more recovered' side is favourable. Moving from actual to budgeted, a bigger budget is favourable. For the other gaps, a bigger later line is favourable.
  5. Add the last three gaps to get volume. Add all four gaps to get cost.

Common mistakes in Fixed Overhead Variances

  • Using actual fixed overhead to compute the volume variance.

    Students mix up expenditure and volume and treat both as 'actual versus something'.

    Fix: Volume = Absorbed − Budgeted. Actual fixed overhead appears only in cost and expenditure variances.

  • Using budgeted hours instead of revised budgeted hours when days differ.

    The calendar variance is missed or the question's day data is ignored.

    Fix: When actual and budgeted days differ, compute revised budgeted hours = budgeted hours × actual days ÷ budgeted days. Use it for capacity and calendar.

  • Getting the sign of the efficiency variance wrong.

    Students subtract in the same order as for labour variance without thinking.

    Fix: Efficiency = rate × (standard hours for actual output − actual hours). Fewer actual hours than standard means favourable.

  • Calculating standard hours from budgeted output.

    Students use budgeted units instead of actual units.

    Fix: Standard hours for actual output = actual units × standard hours per unit. Budgeted units are used only to set the rate.

  • Skipping the F or A label.

    The arithmetic feels like the whole answer.

    Fix: Every variance needs F or A. Examiners award marks for the label and for brief interpretation.

  • Treating the fixed overhead rate as a variable cost that changes with output.

    Students confuse it with variable overhead variances.

    Fix: The budgeted fixed overhead stays the same regardless of output. Only the absorbed amount changes with output.

Worked examples

Example 1

Budget for a month: output 10,000 units, 20,000 standard hours (2 hours per unit), fixed overhead ₹4,00,000. Actual: output 9,500 units, hours worked 19,600, fixed overhead ₹4,10,000. Calculate the fixed overhead cost, expenditure, volume, efficiency and capacity variances.

Show the solution
  1. Standard rate per hour = ₹4,00,000 ÷ 20,000 = ₹20. Rate per unit = ₹4,00,000 ÷ 10,000 = ₹40.
  2. Absorbed fixed overhead = 9,500 × ₹40 = ₹3,80,000.
  3. Cost variance = ₹3,80,000 − ₹4,10,000 = ₹30,000 A.
  4. Expenditure variance = ₹4,00,000 − ₹4,10,000 = ₹10,000 A.
  5. Volume variance = ₹3,80,000 − ₹4,00,000 = ₹20,000 A.
  6. Standard hours for actual output = 9,500 × 2 = 19,000.
  7. Efficiency variance = ₹20 × (19,000 − 19,600) = ₹12,000 A.
  8. Capacity variance = ₹20 × (19,600 − 20,000) = ₹8,000 A. No days are given, so there is no calendar variance.
  9. Check: ₹12,000 A + ₹8,000 A = ₹20,000 A, which matches the volume variance. Also ₹10,000 A + ₹20,000 A = ₹30,000 A.

Answer: Cost variance ₹30,000 A; expenditure ₹10,000 A; volume ₹20,000 A; efficiency ₹12,000 A; capacity ₹8,000 A. Overspending and under-use of capacity both reduced fixed overhead recovery.

Example 2

Budget: 25 working days, 7,500 hours, 2,500 units (3 hours per unit), fixed overhead ₹3,00,000. Actual: 26 working days, 2,420 units, 7,700 hours, fixed overhead ₹3,08,000. Calculate all fixed overhead variances including calendar.

Show the solution
  1. Rate per hour = ₹3,00,000 ÷ 7,500 = ₹40. Rate per unit = ₹3,00,000 ÷ 2,500 = ₹120.
  2. Absorbed fixed overhead = 2,420 × ₹120 = ₹2,90,400.
  3. Cost variance = ₹2,90,400 − ₹3,08,000 = ₹17,600 A.
  4. Expenditure variance = ₹3,00,000 − ₹3,08,000 = ₹8,000 A.
  5. Volume variance = ₹2,90,400 − ₹3,00,000 = ₹9,600 A.
  6. Revised budgeted hours = 7,500 × 26 ÷ 25 = 7,800.
  7. Calendar variance = ₹40 × (7,800 − 7,500) = ₹12,000 F.
  8. Capacity variance = ₹40 × (7,700 − 7,800) = ₹4,000 A.
  9. Standard hours for actual output = 2,420 × 3 = 7,260. Efficiency variance = ₹40 × (7,260 − 7,700) = ₹17,600 A.
  10. Check: ₹12,000 F − ₹4,000 A − ₹17,600 A = ₹9,600 A, which equals the volume variance. Also ₹8,000 A + ₹9,600 A = ₹17,600 A.

Answer: Cost ₹17,600 A; expenditure ₹8,000 A; volume ₹9,600 A; calendar ₹12,000 F; capacity ₹4,000 A; efficiency ₹17,600 A. The extra working day helped, but slow working and overspending outweighed it.

Exam tips

  • Write the rate per hour and per unit at the top. Most lost marks come from using the wrong rate.
  • Always show the check: efficiency + capacity + calendar = volume. Examiners see that you verified your answer.
  • If the question gives working days, a calendar variance is expected. Compute revised budgeted hours first.
  • Mark every variance F or A and add one line of reason, such as idle time or extra overspending. MCQs often test only the sign or the definition.
  • In MCQs, check whether the question asks for 'cost' (absorbed − actual) or 'expenditure' (budgeted − actual). Distractors are built from these two.

Practice questions from Standard Costing and Variance Analysis (Management Accounting)

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 difference between fixed overhead expenditure and volume variance?

Expenditure variance compares budgeted fixed overhead with actual fixed overhead, so it shows over- or under-spending. Volume variance compares absorbed fixed overhead with budgeted fixed overhead, so it shows whether output reached the budget level. Together they make the cost variance.

How is the fixed overhead volume variance split?

It splits into efficiency, capacity and calendar variances. Efficiency compares standard hours for actual output with actual hours. Capacity compares actual hours with revised budgeted hours. Calendar compares revised budgeted hours with budgeted hours. They add up to the volume variance.

What are revised budgeted hours?

These are the budgeted hours adjusted for the actual number of working days: budgeted hours × actual days ÷ budgeted days. They show how many hours would have been available in the actual period at the budgeted pace. They are needed only when the working days differ from budget.

Is the calendar variance always required?

No. If the question gives no working-day data, there is no calendar variance, and capacity is measured against budgeted hours. When the days are given, include it so that the three sub-variances add up to the volume variance.