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Hi Sir,
Good day!
Thank you for your lecture and notes.
However, I’m confused about an answer of a question:The question is:
What’s the possible explanation of the cause of volume varianceThe answer is Over/Under-absorption of fixed overheads
However, I’m so confused because the value of over/under-absorption is supposed to be the difference between actual fixed overhead and absorbed overhead, which has nothing to do with budget overhead. But volume variance is the difference between budget fixed overhead and absorbed fixed overhead, so I don’t know why volume variance is related to over or under-absorption. Could you please kindly help me. Thank you so much!!
You are correct in that the total over/under absorption is the difference between the actual and the absorbed overheads.
However the reason that there is the difference is partly because the actual total overheads are different that the budgeted total overheads, and partly because the budgeted total overheads is different from the total overheads absorbed.
When we look at the variances, the expenditure variance deals with the first reason (i.e. that the actual total is different from the budget total) and the volume variance deals with the second reason (that the budget total is different from the absorbed total).
So although the two together do measure the over/under absorption, the cause of the volume variance is always possibly explained because of over/under absorption.
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