Calculating Fixed Overhead Volume Variance for XYZ Ltd

Let's break down how to calculate the fixed overhead volume variance based on the information provided for XYZ Ltd. The volume variance specifically measures the impact on fixed overhead absorption due to the actual production volume being different from the budgeted production volume.

Understanding Volume Variance

The fixed overhead volume variance is a part of fixed overhead variance analysis. It arises because fixed overheads are applied (absorbed) into product costs based on a budgeted rate per unit of activity (like units produced or hours worked). If the actual activity level differs from the budgeted level, the total fixed overhead absorbed will differ from the budgeted fixed overhead.

The formula for Volume Variance is:

\(\text{Volume Variance} = \text{Absorbed Fixed Overhead} - \text{Budgeted Fixed Overhead}\)

Alternatively, it can be calculated as:

\(\text{Volume Variance} = (\text{Actual Volume} - \text{Budgeted Volume}) \times \text{Budgeted Fixed Overhead Rate per Unit}\)

A positive variance is usually Favourable (F), meaning more fixed overhead was absorbed than budgeted (due to higher actual volume). A negative variance is usually Adverse (A), meaning less fixed overhead was absorbed than budgeted (due to lower actual volume).

Extracting Relevant Information from the Passage

From the provided details for XYZ Ltd, we need the following figures to calculate the fixed overhead volume variance:

• Budgeted Production (in units): 20,000 units
• Actual Production (in units): 22,000 units
• Budgeted Fixed Overhead (in Rupees): 30,000

The passage also mentions a "Budgeted overhead rate is Rs. 1 per unit". However, if we calculate the budgeted rate from the budgeted figures (Rs. 30,000 / 20,000 units), we get Rs. 1.5 per unit. In cost accounting questions, when an explicit rate contradicts the rate derived from total budgeted figures, it is often the case that the rate derived from the totals is the intended rate for variance calculations unless otherwise specified. Let's use the calculated rate of Rs. 1.5 per unit as it is consistent with the total budgeted fixed overhead and production, and see if it leads to one of the options.

Step-by-Step Volume Variance Calculation

Step 1: Calculate the Budgeted Fixed Overhead Rate per Unit

Based on budgeted figures:

\(\text{Budgeted Rate} = \frac{\text{Budgeted Fixed Overhead}}{\text{Budgeted Production Units}}\)

\(\text{Budgeted Rate} = \frac{\text{Rs. } 30,000}{20,000 \text{ units}}\)

\(\text{Budgeted Rate} = \text{Rs. } 1.50 \text{ per unit}\)

Step 2: Calculate the Volume Variance

Using the calculated budgeted rate and the difference in volume:

\(\text{Volume Variance} = (\text{Actual Production} - \text{Budgeted Production}) \times \text{Budgeted Rate per Unit}\)

\(\text{Volume Variance} = (22,000 \text{ units} - 20,000 \text{ units}) \times \text{Rs. } 1.50 \text{ per unit}\)

\(\text{Volume Variance} = 2,000 \text{ units} \times \text{Rs. } 1.50 \text{ per unit}\)

\(\text{Volume Variance} = \text{Rs. } 3,000\)

Step 3: Determine if the Variance is Favourable or Adverse

Actual production (22,000 units) is greater than budgeted production (20,000 units). This means XYZ Ltd produced more units than planned. Since each unit absorbs fixed overhead at the budgeted rate, producing more units leads to absorbing more fixed overhead than budgeted. Therefore, the variance is Favourable.

\(\text{Volume Variance} = \text{Rs. } 3,000 \text{ (Favourable)}\)

The figures for the number of working days and actual hours worked are not needed for the calculation of fixed overhead volume variance, which is based on production units and the budgeted rate per unit.

Conclusion on Volume Variance

Based on the calculation using the budgeted fixed overhead and budgeted production to determine the rate, the fixed overhead volume variance for XYZ Ltd in the given month is Rs. 3,000 (Favourable).

Revision Table: Fixed Overhead Variances

Here is a quick overview of key fixed overhead variances:

Additional Information: Cost Variances Explained

Variance analysis is a critical tool in cost accounting for performance evaluation and control. It involves comparing actual results with budgeted or standard amounts to identify differences, known as variances. These variances help management pinpoint areas that need attention.

• Fixed Overhead Variances: These relate to costs that remain relatively constant within a relevant range of activity. Fixed overhead variances are typically broken down into Spending Variance and Volume Variance. The Spending Variance focuses on whether the actual fixed overhead cost incurred differs from the budgeted amount. The Volume Variance, as calculated above, focuses on whether the actual production volume differs from the budgeted volume, affecting how much fixed overhead is absorbed.
• Variable Overhead Variances: These relate to costs that change in proportion to the level of activity. Variable overhead variances are usually broken down into Spending Variance and Efficiency Variance.
• Material and Labour Variances: Similar analysis is performed for direct materials (Price and Usage variances) and direct labour (Rate and Efficiency variances).

Understanding these variances helps businesses manage costs effectively and improve future budgeting and operational efficiency.