Overhead variances and reconciling standard and actual cost

Total variable overhead variance

Total variable overhead variance = standard variable overhead for actual output - actual variable overhead.

Standard variable overhead for actual output = actual output x standard variable overhead per unit (often a rate per standard labour hour x standard hours per unit).

Positive is favourable, negative adverse.

Total fixed overhead variance

Fixed overheads are absorbed using a predetermined rate:

Fixed overhead absorption rate (OAR) = budgeted fixed overhead / budgeted output (or hours).

Total fixed overhead variance = fixed overhead absorbed (OAR x actual output) - actual fixed overhead.

This matches the October 2017 mark scheme (absorbed £17,000 - actual £15,730 = £1,270 favourable). An adverse variance can come from spending more than budget or from producing less than budgeted, so fewer units absorb the overhead.

Reconciliation statement

Standard: variable overhead £3.00 per labour hour; budgeted fixed overhead £30,000 for 2,500 units (OAR £12.00 per unit). Actual: variable overhead £9,350; fixed overhead £29,000; output 2,000 units (the material and labour figures are from the previous lesson).

Reconciliation: favourable variances are deducted, adverse added

Interpreting

Here the fixed overhead variance of £5,000 A is mostly due to volume: only 2,000 of the budgeted 2,500 units were made, so 500 x £12.00 = £6,000 of overhead was not absorbed, while spending was £1,000 below budget.

Worked example

Calculate the total variable overhead variance and the total fixed overhead variance for the example.

1. Standard variable overhead per unit = 1.5 hours x £3.00 = £4.50
2. Variable: 2,000 x 4.50 - 9,350 = £350 A
3. OAR = 30,000 / 2,500 = £12.00 per unit; absorbed = 2,000 x 12.00 = £24,000
4. Fixed: 24,000 - 29,000 = £5,000 A

Answer: Variable overhead £350 A; fixed overhead £5,000 A

Check yourself

1. Budgeted fixed overhead is £48,000 and budgeted output is 12,000 units. Calculate the fixed overhead absorption rate per unit.
   Show answer

   £4.00. 48,000 / 12,000 = £4.00 per unit.

2. OAR £4.00 per unit; actual output 11,000 units; actual fixed overhead £46,500. Calculate the total fixed overhead variance (positive for favourable, negative for adverse).
   Show answer

   £-2500. Absorbed 44,000 - actual 46,500 = -£2,500: adverse.

3. Standard variable overhead is £2.40 per unit. 5,000 units were made and actual variable overhead was £11,600. Calculate the total variable overhead variance (positive for favourable, negative for adverse).
   Show answer

   £400. 12,000 - 11,600 = £400 favourable.

4. Variable overhead is absorbed at £5 per standard labour hour; each unit needs 0.5 standard hours. 8,000 units were made; actual variable overhead was £21,300. Calculate the total variable overhead variance (positive for favourable, negative for adverse).
   Show answer

   £-1300. Standard = 8,000 x 0.5 x 5 = 20,000; 20,000 - 21,300 = -£1,300: adverse.

5. The standard cost of actual output is £64,000. Variances: materials £1,200 A, labour £800 F, variable overhead £300 A, fixed overhead £1,500 A. Calculate the actual cost.
   Show answer

   £66200. 64,000 + 1,200 - 800 + 300 + 1,500 = £66,200.

6. Fixed overhead spending was exactly as budgeted, but output was below budget. What is the total fixed overhead variance?
   • Favourable, because spending was on budget
   • Adverse, because less overhead was absorbed
   • Zero, because spending was on budget
   • It cannot be calculated
   Show answer

   Adverse, because less overhead was absorbed. Absorbed overhead (OAR x actual output) is less than the actual overhead.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting specification (XAC11/YAC11), Issue 2
• Pearson Edexcel IAL Accounting WAC12 Unit 2 mark scheme, October 2017

Last updated 8 November 2026. Spotted a mistake? Tell us.