standard costing – adverse / favourable

With regard to the sales volume variance, what you say is correct. If you sell fewer units that budgeted then you will expect to make less profit than budgeted – so adverse.

Fixed overhead variances are the strange one (when (and only when) we are using absorption costing). We are really assuming always that what was limiting the number of units we can produce (and therefore sell) was the amount of labour available. So….if we manage to actually get more labour hours than we budgeted on getting, then we will be capable of making more units. If we make more units then that is good (because we can then sell more unit) and so it is favourable.

Fixed overheads are the strange one. If you have not watched the lecture on variances then do, because it might help you.

Because by definition fixed overheads in total should not be affected by the level of production.

With marginal costing the only variance is therefore the difference between the budget total and the actual total.

However with absorption costing (as you will know from the lectures on marginal and absorption costing) fixed overheads are absorbed into the unit cost and therefore as production changes the fixed overheads charged change as well. This needs ‘correcting’ for (because the total should not change with production) which is why we have the volume variance (which can then be analysed into capacity variance and efficiency variance).

Again, I explain all this in the lecture, and it is exactly the same problem and the same reason as the adjustment for over or under absorption that is dealt with in the earlier lectures on marginal and absorption costing.