Understanding Fixed Overhead Calendar Variance

The question asks us to calculate the calendar variance for fixed overheads based on the provided budget and actual data for XYZ Ltd. Calendar variance is a part of fixed overhead variance analysis and specifically measures the impact of having more or fewer working days than budgeted.

Fixed overhead calendar variance arises solely due to the difference between the budgeted number of working days and the actual number of working days in a period. It is calculated using the budgeted fixed overhead rate per day.

Calculating Fixed Overhead Calendar Variance

The formula for Fixed Overhead Calendar Variance is:

\( \text{Calendar Variance} = (\text{Actual number of working days} - \text{Budgeted number of working days}) \times \text{Budgeted fixed overhead rate per day} \)

Step 1: Calculate Budgeted Fixed Overhead Rate per Day

We are given the total budgeted fixed overhead and the budgeted number of working days.

• Budgeted Fixed Overhead = Rs. 30,000
• Budgeted Working Days = 25 days

Budgeted fixed overhead rate per day is calculated as:

\( \text{Budgeted rate per day} = \frac{\text{Budgeted Fixed Overhead}}{\text{Budgeted Working Days}} \)

\( \text{Budgeted rate per day} = \frac{30,000}{25} = \text{Rs. } 1,200 \text{ per day} \)

Step 2: Calculate Calendar Variance

Now we use the actual and budgeted working days and the budgeted rate per day.

• Actual Working Days = 27 days
• Budgeted Working Days = 25 days
• Budgeted rate per day = Rs. 1,200 per day

\( \text{Calendar Variance} = (27 \text{ days} - 25 \text{ days}) \times \text{Rs. } 1,200 \text{ per day} \)

\( \text{Calendar Variance} = 2 \text{ days} \times \text{Rs. } 1,200 \text{ per day} \)

\( \text{Calendar Variance} = \text{Rs. } 2,400 \)

Step 3: Determine if the Variance is Favourable or Adverse

The variance is favourable if the actual working days are more than the budgeted working days, as more fixed overhead can be absorbed over a longer period at the budgeted daily rate. Conversely, it is adverse if the actual working days are fewer than budgeted.

In this case, Actual Working Days (27) > Budgeted Working Days (25). The difference is 2 extra days. Since the actual days are more, the variance is Favourable.

The Calendar Variance is Rs. 2,400 Favourable.

Summary of Calculations

The calculated calendar variance of Rs. 2,400 (Favourable) matches one of the given options.

Revision Table: Key Concepts

Additional Information on Fixed Overhead Variance Analysis

Fixed Overhead Variance analysis helps management understand why actual fixed overhead costs or absorption differ from budgeted amounts. While fixed costs are often considered constant in total within a relevant range, their variance analysis is crucial for control and future budgeting.

• Expenditure Variance: This variance highlights the control over actual spending on fixed overhead items like rent, salaries, insurance, etc.
• Volume Variance: This variance arises because fixed overhead is absorbed based on a standard rate per unit or hour. If the actual production volume (or hours worked) differs from the budgeted volume, the amount of fixed overhead absorbed will differ from the budgeted fixed overhead, leading to this variance.
• Calendar Variance Significance: The calendar variance is particularly useful in industries where production capacity utilization is highly dependent on the number of available working days. An increase in working days provides more capacity to absorb fixed overheads, leading to a favourable variance, assuming other factors remain constant.
• Interpreting Variances: Favourable variances are generally seen as positive (actual results better than budget), while adverse variances are seen as negative (actual results worse than budget). Management investigates significant variances to identify their root causes and take corrective actions.