OVERHEAD VOLUME VARIANCE

The  overhead volume variance  is the difference between normal capacity hours and standard hours allowed times the fixed overhead rate. The overhead volume variance relates to whether fixed costs were under‐ or overapplied during the year. For example, the overhead volume variance answers the question of whether Xonic effectively used its fixed costs. If Xonic produces less Xonic Tonic than normal capacity would allow, an unfavorable variance results. Conversely, if Xonic produces more Xonic Tonic than what is considered normal capacity, a favorable variance results.

The formula for computing the overhead volume variance is as follows.

FixedOverheadRate×⎛⎜⎝NormalStandardCapacity−HoursHoursAllowed⎞⎟⎠=OverheadVolumeVarianceFixedOverheadRate×(NormalStandardCapacity−HoursHoursAllowed)=OverheadVolumeVarianceILLUSTRATION 23B-3 Formula for overhead volume variance

To illustrate the fixed overhead rate computation, recall that Xonic budgeted fixed overhead cost for the year of $52,800 (Illustration 23-6 on page 1124). At normal capacity, 26,400 standard direct labor hours are required. The fixed overhead rate is therefore $2 per hour ($52,800÷26,400 hours)$2 per hour ($52,800÷26,400 hours).

Xonic produced 1,000 units of Xonic Tonic in June. The standard hours allowed for the 1,000 gallons produced in June is 2,000 (1,000 gallons×2 hours)2,000 (1,000 gallons×2 hours). For Xonic, normal capacity for June is 1,100, so standard direct labor hours for June at normal capacity is 2,200 (26,400 annual hours÷12 months)2,200 (26,400 annual hours÷12 months). The computation of the overhead volume variance in this case is as follows.

FixedOverheadRate×⎛⎜⎝NormalStandardCapacity−HoursHoursAllowed⎞⎟⎠=OverheadVolumeVariance$2×(2,200−2,000)=$400 UFixedOverheadRate×(NormalStandardCapacity−HoursHoursAllowed)=OverheadVolumeVariance$2×(2,200−2,000)=$400 UILLUSTRATION 23B-4 Computation of overhead volume variance for Xonic

In Xonic’s case, a $400 unfavorable volume variance results. The volume variance is unfavorable because Xonic produced only 1,000 gallons rather than the normal capacity of 1,100 gallons in the month of June. As a result, it underapplied fixed overhead for that period.

In computing the overhead variances, it is important to remember the following.

1. Standard hours allowed are used in each of the variances.

2. Budgeted costs for the controllable variance are derived from the flexible budget.

3. The controllable variance generally pertains to variable costs.

4. The volume variance pertains solely to fixed costs.