FIXED OVERHEAD

VARIANCE
 MARGINAL COSTING SYSTEM

With a marginal costing profit and loss, no overheads are

absorbed, the amount spent is simply written off to the
income statement.
So with marginal costing the only fixed overhead variance
is the difference
between what was budgeted to be spent and what was
actually spent, i.e. the
fixed overhead expenditure variance.
 ABSORPTION COSTING SYSTEM

• Under absorption costing we use an overhead absorption rate

to absorb overheads.
• Variances will occur if this absorption rate is incorrect (just as
we will get over/under-absorption).
• So with absorption costing we calculate the fixed overhead
expenditure variance and the fixed overhead volume variance.
• The fixed overhead volume variance can be further split into a
capacity and efficiency variance:
• Fixed OH volume variance = Fixed OH efficiency variance +
Fixed OH capacity variance
 CALCULATIONS
In case of marginal costing
O Fixed overhead Expenditure variance
Budgeted expenditure – Actual expenditure

In case of Absorption costing

O Fixed overhead Expenditure variance
[under or over absorption]
O Fixed overhead volume variance
(BU–AU)*OAR Per unit
volume variance

Capacity Efficiency
(BH-AH)*OAR per hour (SH-AH)*OAR per hour