How is the fixed overhead variance analyzed under absorption costing?

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Answer

Under absorption costing the total fixed overhead variance splits into the expenditure variance (actual vs budgeted fixed overhead) and the volume variance (the effect of producing more/less than the budgeted volume on which absorption was based). The volume variance further splits into capacity and efficiency variances. Under marginal costing, only the expenditure variance applies.

Expenditure = Budgeted FOH - Actual FOH.
Volume = (Actual output - Budgeted output) x std FOH rate.

Real-world example Producing below budget under-absorbs fixed overhead, creating an adverse volume variance.

Common follow-ups: Why is there no volume variance under marginal costing? | What splits from the volume variance?

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