fixed overhead and volume variance

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    Hi John, was reading the chat log on 11 June, and noticed that you mentioned:

    [12:57:26] johnmoffat : {Tophigh} It depends what you mean. If you are asking
    about producing a flexed budget, then it stays the same if it is marginal costing,
    but it changes if it is absorption costing (which is why there is a volume variance)

    could you please elaborate a little bit on why there is a volume variance because absorption costing is used? thanks.

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    John Moffat
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    Suppose you are using absorption costing and the total cost per unit includes $3 per unit for fixed overheads.

    If you originally budgeted on producing 10000 units, then you were budgeting on there being total fixed costs of $30000.

    Suppose you actually produced 9000 units and the actual fixed overheads were $32000.

    In your flexed budget you would have fixed overheads as 9000 units (actual production) x $3 per unit (standard cost) = $27000.

    This means that the total variance is 32000 – 27000 = 5000. This can be analysed into 2000 (32000 actual total – 30000 budget total) which is the expenditure variance. And a volume variance (due to producing 1000 units less) of 1000 x $3 = 3000.

    For more detail on this watch my lecture on this website.

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