Explain the difference between a fixed overhead volume variance and an overhead capacity variance.

• A. The overhead volume variance compares actual hours to budgeted hours used to absorb overhead.
• B. Volume variance relates to actual output vs budgeted output; capacity variance relates to actual hours vs budgeted hours used to absorb overhead.
• C. Volume variance relates to the efficiency of labor, while capacity variance relates to the efficiency of machines.
• D. Both variances are unrelated to overhead absorption.

Answer: (B)

In fixed overhead variance analysis, the volume variance shows whether you absorbed more or less fixed overhead than planned because the level of activity differed from the budget. It reflects the overall effect of actual production (actual output) versus what was budgeted (budgeted output) on the amount of overhead absorbed.

The capacity variance is a component of that volume variance. It isolates the part caused by how much of the available capacity you actually used, i.e., the difference between actual hours worked and budgeted hours, multiplied by the fixed overhead rate. In other words, volume variance looks at the broader change in activity level, while capacity variance focuses specifically on utilization of hours (capacity) to absorb overhead.