# Variance Analysis Example 2 Continued, Example 3

1. says

how could the Capacity variance is favorable we budgeted 43,500 hrs whereas we actually worked 44100 hrs this would increase our cost also

• says

Remember that total fixed overheads should not (by definition) be affected by the number of units produced (or the number of hours worked), and with marginal costing there is no volume (split into capacity and efficiency) fixed overhead variance (as you will see in the next example).

The problem when we are using absorption costing is that fixed overheads have been absorbed as part of the cost card – the budgeted total has been absorbed on the budgeted hours. The standard profit is based on this budgeted unit cost.
If we have more hours available than budget then we are capable of making more units. This means that the fixed overheads per unit will be lower, which results in more profit. That is why the variance is favourable.

2. says

For Exam sake, can we assume that anything on which fixed overheads (costing) is dependant, we need to assume that it is limited?

• says

No. If you are asked for fixed overhead and capacity variances, then you calculate them as in the lecture (which is effectively assuming that labour is limited).

• says

Got it. Thanks for your reply and also for your help..cleared F2 with 80% with just less than 35 days of preparation, all I did was went thru text, listened to ur lectures n practised every question in ur lecture notes. Keep up the great work

• says

In practice it could be several different things. However in the exam we assume labour is limited (and it is only relevant for fixed overhead variances when using absorption costing)

3. says

how is volume variance 3000 adverse said by you and capacity and efficiency be 3000 favourable(1800 f+ 1200f)

4. says

You don’t sit in the exam and say ” I dont see the point in doing this “!! Preposterous! LOL!!