How is fixed overhead volume variance calculated?

How is fixed overhead volume variance calculated?

• A. By assessing the difference between budgeted and actual output
• B. By calculating the total variable costs incurred
• C. By comparing budgeted production with historical data
• D. By analyzing variances over multiple time periods

Answer: (A)

The calculation of fixed overhead volume variance focuses specifically on the relationship between budgeted output levels and actual output levels produced. This variance measures how efficiently fixed overheads have been applied relative to the level of production that was expected. When assessing the difference between budgeted and actual output, the aim is to identify any discrepancies that might result from producing more or less than what was planned. If the actual production exceeds the budgeted production, it can indicate that fixed overhead costs are being spread over a larger number of units, potentially reducing the per-unit cost of overhead. Conversely, if actual production is less than budgeted, the fixed overhead costs may be allocated across fewer units, which could increase per-unit costs and lead to unfavorable variances. The other choices do not directly pertain to the fixed overhead volume variance. For instance, calculating total variable costs incurred pertains to variable overhead variances, not fixed overhead volume variances. Similarly, comparing budgeted production with historical data might provide insights but does not specifically measure the efficiency and utilization of fixed overhead within the context of the current budget and output, and analyzing variances over multiple time periods does not directly address the fixed overhead volume variance, which is focused on a single accounting period’s budget versus actual performance.

The calculation of fixed overhead volume variance focuses specifically on the relationship between budgeted output levels and actual output levels produced. This variance measures how efficiently fixed overheads have been applied relative to the level of production that was expected.

When assessing the difference between budgeted and actual output, the aim is to identify any discrepancies that might result from producing more or less than what was planned. If the actual production exceeds the budgeted production, it can indicate that fixed overhead costs are being spread over a larger number of units, potentially reducing the per-unit cost of overhead. Conversely, if actual production is less than budgeted, the fixed overhead costs may be allocated across fewer units, which could increase per-unit costs and lead to unfavorable variances.

The other choices do not directly pertain to the fixed overhead volume variance. For instance, calculating total variable costs incurred pertains to variable overhead variances, not fixed overhead volume variances. Similarly, comparing budgeted production with historical data might provide insights but does not specifically measure the efficiency and utilization of fixed overhead within the context of the current budget and output, and analyzing variances over multiple time periods does not directly address the fixed overhead volume variance, which is focused on a single accounting period’s budget versus actual performance.