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ACCA Applied Knowledge · Management Accounting · Monitoring performance and reporting

A company reports a favourable fixed overhead expenditure variance and an adverse fixed overhead volume variance under absorption costing. Which is the most likely combined explanation?

The likely explanation is that actual fixed overhead spending was below budget while actual output fell short of the budgeted output. Lower spending gives a favourable expenditure variance, and lower production means under-absorbed overhead, giving an adverse volume variance.

  1. AActual fixed overhead spending was below budget, but actual output was below budgeted outputCorrect
  2. BActual fixed overhead spending was above budget, and actual output was above budgeted output
  3. CActual fixed overhead spending was below budget, and actual output was above budgeted output
  4. DActual fixed overhead spending was above budget, but actual output was below budgeted output

Explanation

A favourable expenditure variance arises when actual fixed overhead cost is less than budgeted. An adverse volume variance arises when actual output is below budgeted output, so less overhead is absorbed than budgeted. Only the first option has both conditions.

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