Understanding Fixed Overhead Capacity Variance

Fixed overhead capacity variance is a part of fixed overhead volume variance. It measures the cost difference arising from the difference between the hours actually worked and the budgeted hours, valued at the standard fixed overhead rate per hour. It essentially tells us how much fixed overhead was over or under absorbed due to working more or less hours than planned (budgeted).

Calculating Capacity Variance: Step-by-Step

The formula for calculating Fixed Overhead Capacity Variance is:

$$\text{Capacity Variance} = (\text{Actual Hours Worked} - \text{Budgeted Hours}) \times \text{Budgeted Fixed Overhead Rate Per Hour}$$

Let's break down the calculation using the information provided by XYZ Ltd.

Extracting Relevant Data

From the passage, we have the following key figures:

• Budgeted Fixed Overhead: Rs. 30,000
• Budgeted Production: 20,000 units
• Actual Hours Worked: 31,500 hours

The passage also mentions a "Budgeted overhead rate is Rs. 1 per unit" and actual production (22,000 units), actual fixed overhead (31,000), budgeted days (25), and actual days (27). While useful for other variances, these specific values might be relevant for inferring the budgeted hours and rate needed for the capacity variance calculation.

Determining Budgeted Hours and Rate Per Hour

The formula requires Budgeted Hours and the Budgeted Fixed Overhead Rate Per Hour. The problem states Budgeted Fixed Overhead is Rs. 30,000. To find the rate per hour, we need Budgeted Hours. The passage doesn't explicitly state the total Budgeted Hours planned.

However, given the options and the typical structure of such problems, the Budgeted Fixed Overhead (Rs. 30,000) usually relates to a specific level of activity, which should be the Budgeted Hours.

Let's consider the statement "Budgeted overhead rate is Rs. 1 per unit". If this rate was for fixed overhead, the budgeted fixed overhead would be 20,000 units * Rs. 1/unit = Rs. 20,000, which contradicts the given Rs. 30,000. It is highly likely that the rate of Rs. 1 mentioned is the Budgeted Fixed Overhead Rate Per Hour, and the total Budgeted Fixed Overhead of Rs. 30,000 corresponds to Budgeted Hours of 30,000 (since 30,000 hours * Rs. 1/hour = Rs. 30,000).

Based on this interpretation and working towards the provided answer, we assume:

• Budgeted Hours = 30,000 hours
• Budgeted Fixed Overhead Rate Per Hour = Rs. 1 (as this aligns Rs. 30,000 Budgeted Fixed Overhead with 30,000 Budgeted Hours)

We are given Actual Hours Worked = 31,500 hours.

Applying the Formula

Now we can substitute the values into the capacity variance formula:

$$\text{Capacity Variance} = (\text{Actual Hours Worked} - \text{Budgeted Hours}) \times \text{Budgeted Fixed Overhead Rate Per Hour}$$

$$\text{Capacity Variance} = (31,500 \text{ hours} - 30,000 \text{ hours}) \times \text{Rs. } 1 \text{ per hour}$$

$$\text{Capacity Variance} = 1,500 \text{ hours} \times \text{Rs. } 1 \text{ per hour}$$

$$\text{Capacity Variance} = \text{Rs. } 1,500$$

Determining Favourable or Adverse

The variance is determined by comparing the Actual Hours Worked to the Budgeted Hours. Since Actual Hours Worked (31,500) are more than the Budgeted Hours (30,000), it means the company utilized more capacity than budgeted. More capacity utilization allows for potential absorption of more fixed overhead, leading to a Favourable variance.

Thus, the variance is Rs. 1,500 (Favourable).

Let's summarise the calculation steps:

The fixed overhead capacity variance for the month is Rs. 1,500 Favourable.

Revision Table: Fixed Overhead Variances

Additional Information: Understanding Fixed Overhead Variances

Fixed overhead variances help management understand the reasons for differences between actual and budgeted fixed overhead costs. Unlike variable overhead, fixed overhead costs do not change in total with changes in activity level within a relevant range. However, when fixed overhead is absorbed into production costs, it is done using a rate (per unit or per hour). Variances arise because either the actual costs differ from budget (expenditure variance) or the actual activity level (hours or units) differs from the budgeted level (volume variance).

The fixed overhead volume variance specifically highlights the effect of producing more or less than the budgeted quantity. This volume variance can be further analysed into capacity variance and efficiency variance. Capacity variance focuses on the utilisation of available time (actual hours vs. budgeted hours), while efficiency variance focuses on the efficiency of labour or machine usage relative to the actual output achieved (standard hours for actual output vs. actual hours).

In this problem, we calculated the capacity variance, which indicates that working more hours than budgeted led to a favourable variance, implying potentially better utilisation of the fixed resources represented by fixed overhead costs.