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Fixed overhead capacity variance

The fixed overhead capacity variance values actual hours worked compared with budgeted hours at the standard fixed-overhead absorption rate. Under favourable-positive convention it is (actual hours − budgeted hours) × rate. It is one component of the absorption fixed-overhead volume variance and measures use of planned time capacity. The label favourable means more absorption relative to budget, not necessarily an economically desirable use of overtime or surplus production.

Worked example

Actual hours are 9,500, budgeted hours 10,000 and fixed overhead rate $5. Capacity variance is $2,500 adverse.

Common mistake

Do not use standard hours produced in the capacity component; that would calculate the volume effect instead.

Where it appears in your exams

QualificationExamRelationshipPeriod
ACCA MA Direct September 2026–June 2027
FIA FMA Direct September 2026–June 2027