How is fixed overhead volume variance calculated and what does it indicate?

• A. Volume variance = (actual output − budgeted output) × fixed overhead absorption rate per unit; indicates under- or over-absorption due to activity level.
• B. Volume variance = (actual overhead − budgeted overhead) × absorption rate; indicates efficiency of overhead control.
• C. Volume variance = (budgeted output − actual output) × variable overhead rate; indicates usage of materials.
• D. Volume variance = (actual output − budgeted output) × variable rate; indicates price variance.

Answer: (A)

Fixed overhead volume variance captures how the level of activity affects the absorption of fixed overhead into products. It is calculated as (actual output − budgeted output) × fixed overhead absorption rate per unit. This shows whether fixed overhead was under- or over-absorbed because production turned out to be higher or lower than planned. If actual output exceeds budgeted output, you absorb more fixed overhead than planned, giving a favorable (over-absorption) result; if actual output is less, you absorb less, yielding an unfavorable (under-absorption) result. The absorption rate per unit is usually budgeted fixed overhead divided by budgeted output, tying the fixed cost to the chosen activity base. The other formulations mix in variable overhead rates or use actual overhead, which pertain to different variances and don’t measure the impact of activity level on fixed overhead absorption.