Calculating Fixed Overhead Expenditure Variance

Let's analyze the information provided by XYZ Ltd. to understand the expenditure variance for fixed overheads. The question asks specifically for the expenditure variance.

Expenditure variance for fixed overhead measures the difference between the actual fixed overhead costs incurred and the budgeted fixed overhead costs for a period. It essentially tells us if we spent more or less than planned on fixed overheads.

Here is the relevant data from the passage:

• Budgeted Fixed Overhead: Rs. 30,000
• Actual Fixed Overhead: Rs. 31,000

The formula for calculating the Fixed Overhead Expenditure Variance is:

Fixed Overhead Expenditure Variance = Actual Fixed Overhead - Budgeted Fixed Overhead

Let's plug in the numbers from the passage:

Fixed Overhead Expenditure Variance = Rs. 31,000 - Rs. 30,000

Fixed Overhead Expenditure Variance = Rs. 1,000

Now, we need to determine if this variance is favourable or adverse. An adverse variance occurs when the actual cost is higher than the budgeted cost. A favourable variance occurs when the actual cost is lower than the budgeted cost.

In this case, the actual fixed overhead (Rs. 31,000) is higher than the budgeted fixed overhead (Rs. 30,000). Therefore, the variance is adverse.

So, the expenditure variance is Rs. 1,000 (Adverse).

Calculation Summary:

• Actual Fixed Overhead: Rs. 31,000
• Budgeted Fixed Overhead: Rs. 30,000
• Variance = Actual - Budgeted = $\text{Rs. } 31,000 - \text{Rs. } 30,000 = \text{Rs. } 1,000$
• Since Actual > Budgeted, the variance is Adverse.

The other data provided, such as working days, production units, and actual hours worked, are relevant for calculating other variances like volume variance or efficiency variance, but they are not needed to calculate the fixed overhead expenditure variance, which only compares actual fixed costs to budgeted fixed costs.

Revision Table: Fixed Overhead Variances

Additional Information on Overhead Variances

Overhead variances help management understand the reasons for differences between planned (budgeted) and actual overhead costs. Variances can be categorised into fixed overhead variances and variable overhead variances.

Fixed Overhead Variances:

• Expenditure Variance: As calculated above, it compares the actual amount spent on fixed overheads to the budgeted amount. For example, if rent was expected to be Rs. 10,000 but turned out to be Rs. 10,500, the Rs. 500 difference is an adverse expenditure variance.
• Volume Variance: This variance arises because fixed overheads are applied (absorbed) into production based on a budgeted rate per unit or per hour, but the actual production volume or hours worked differs from the budget. Since total fixed costs don't change with volume in the short run, producing more units spreads the fixed cost over a larger base (favourable volume variance), and producing fewer units concentrates the fixed cost on a smaller base (adverse volume variance).

Variable Overhead Variances:

• Expenditure/Spending Variance: Compares the actual variable overhead incurred to the flexible budget variable overhead based on actual hours or volume. It measures how well spending on variable overhead was controlled.
• Efficiency Variance: Compares the flexible budget variable overhead based on actual hours to the flexible budget variable overhead based on standard hours allowed for actual output. It measures the efficiency of the base used for variable overhead (e.g., labour hours).

Understanding these variances helps managers identify areas for improvement in cost control and efficiency.