Study guide
4.3 Overhead and Sales Variances
AAT Level 3 Diploma in Accounting - Management Accounting Techniques MATS
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1 Chapter 1: Purpose and Use of Management Accounting
1.1 Role and Scope of Management Accounting 1.2 Cost Classification and Responsibility Accounting 1.3 Information Needs and Management Reporting
2 Chapter 2: Techniques for Dealing with Costs
2.1 Cost Behaviour Patterns 2.2 High-Low Method and Cost Estimation 2.3 Costing Methods: Job, Batch, Unit, and Service Costing 2.4 Cost Accounting Records and Journals
3 Chapter 3: Attributing Costs to Organisational Requirements
3.1 Material Costs and Inventory Valuation 3.2 Labour Costing and Remuneration Systems 3.3 Overhead Allocation, Apportionment, and Reapportionment 3.4 Overhead Absorption and Activity-Based Costing
4 Chapter 4: Investigating Deviations from Budgets - Variance Analysis
4.1 Standard Costing and Flexible Budgets 4.2 Direct Material and Direct Labour Variances 4.3 Overhead and Sales Variances 4.4 Reconciliation Operating Statements and Variance Interpretation
5 Chapter 5: Spreadsheet Techniques
5.1 Spreadsheet Design Principles and Data Integrity 5.2 Essential Spreadsheet Functions for Accounting 5.3 Data Analysis, Formatting, and Security
6 Chapter 6: Short-Term Decision Making
6.1 Marginal vs Absorption Costing 6.2 Cost-Volume-Profit (CVP) and Break-Even Analysis 6.3 Relevant Costing and Non-Routine Decisions 6.4 Limiting Factor Analysis and Make-or-Buy Decisions
7 Chapter 7: Principles of Cash Management
7.1 Cash vs Profit and Cash Flow Forecasting 7.2 Working Capital Cycle and Cash Control 7.3 Liquidity, Treasury, and Financing Options
4.3 Overhead and Sales Variances
Key Takeaways Explain This Topic AI
Variable production overhead variances comprise Expenditure Variance (AH × (SVOR - AVOR)) and Efficiency Variance ((SH - AH) × SVOR), with efficiency tied directly to labour hours.
Under absorption costing, total fixed overhead variance includes Expenditure Variance (Budgeted vs Actual) and Volume Variance (Absorbed Overhead vs Budgeted Overhead).
Fixed overhead volume variance sub-divides into Capacity Variance ((Actual Hours - Budgeted Hours) × OAR/hr) and Efficiency Variance ((SH - AH) × OAR/hr).
Under marginal costing, fixed overheads are treated as period costs, meaning fixed overhead volume, capacity, and efficiency variances do not exist.
Sales Volume Variance is valued using standard profit per unit under absorption costing, but valued using standard contribution per unit under marginal costing.
Last updated: August 2026
4.3 Overhead and Sales Variances
Overhead variances analyze indirect production expenses, while sales variances evaluate revenue deviations driven by price changes and market volume shifts. Analyzing overhead variances requires identifying whether the organization operates under Absorption Costing or Marginal Costing .
Variable Production Overhead Variances
Variable overheads vary in direct proportion to activity (measured in labour or machine hours). Variable overhead variances share the exact same efficiency hour differential as direct labour variances.
1. Total Variable Overhead Variance Total VOH Variance = Flexed Variable Overhead − Actual Variable Overhead \text{Total VOH Variance} = \text{Flexed Variable Overhead} - \text{Actual Variable Overhead} Total VOH Variance = Flexed Variable Overhead − Actual Variable Overhead Total VOH Variance = ( S H × S V O R ) − Actual VOH Spent \text{Total VOH Variance} = (SH \times SVOR) - \text{Actual VOH Spent} Total VOH Variance = ( S H × S V OR ) − Actual VOH Spent
Where S V O R SVOR S V OR = Standard Variable Overhead Rate per hour.
2. Variable Overhead Expenditure Variance
Measures the difference between the actual variable overhead cost per hour and standard rate per hour. VOH Expenditure Variance = ( A H worked × S V O R ) − Actual VOH Spent = A H worked × ( S V O R − A V O R ) \text{VOH Expenditure Variance} = (AH_{\text{worked}} \times SVOR) - \text{Actual VOH Spent} = AH_{\text{worked}} \times (SVOR - AVOR) VOH Expenditure Variance = ( A H worked × S V OR ) − Actual VOH Spent = A H worked × ( S V OR − A V OR )
3. Variable Overhead Efficiency Variance
Measures the overhead impact of working more or fewer hours than standard allowed for actual output. VOH Efficiency Variance = ( S H − A H worked ) × S V O R \text{VOH Efficiency Variance} = (SH - AH_{\text{worked}}) \times SVOR VOH Efficiency Variance = ( S H − A H worked ) × S V OR
Key Rule : If direct labour hours are used as the absorption base, the Variable Overhead Efficiency Variance will always move in the exact same direction (Favourable or Adverse) as the Labour Efficiency Variance!
Fixed Production Overhead Variances: Absorption Costing
Under absorption costing, fixed production overheads are absorbed into products using a Predetermined Overhead Absorption Rate ( O A R OAR O A R ): O A R = Budgeted Fixed Overhead Budgeted Output Units or Budgeted Labour/Machine Hours OAR = \frac{\text{Budgeted Fixed Overhead}}{\text{Budgeted Output Units or Budgeted Labour/Machine Hours}} O A R = Budgeted Output Units or Budgeted Labour/Machine Hours Budgeted Fixed Overhead
Total Fixed Overhead Variance is the difference between absorbed overhead and actual overhead incurred: Total Fixed Overhead Variance = Absorbed Fixed Overhead − Actual Fixed Overhead \text{Total Fixed Overhead Variance} = \text{Absorbed Fixed Overhead} - \text{Actual Fixed Overhead} Total Fixed Overhead Variance = Absorbed Fixed Overhead − Actual Fixed Overhead Absorbed Fixed Overhead = Actual Units Produced × O A R unit ( or S H × O A R hour ) \text{Absorbed Fixed Overhead} = \text{Actual Units Produced} \times OAR_{\text{unit}} \quad (\text{or } SH \times OAR_{\text{hour}}) Absorbed Fixed Overhead = Actual Units Produced × O A R unit ( or S H × O A R hour )
Fixed Overhead Variance Sub-Tree
Fixed Overhead Expenditure Variance :
Measures spending differences regardless of volume. FOH Expenditure Variance = Budgeted Fixed Overhead − Actual Fixed Overhead \text{FOH Expenditure Variance} = \text{Budgeted Fixed Overhead} - \text{Actual Fixed Overhead} FOH Expenditure Variance = Budgeted Fixed Overhead − Actual Fixed Overhead
Fixed Overhead Volume Variance :
Measures the over- or under-absorption of fixed costs resulting from producing more or fewer units than budgeted. FOH Volume Variance = Absorbed Fixed Overhead − Budgeted Fixed Overhead \text{FOH Volume Variance} = \text{Absorbed Fixed Overhead} - \text{Budgeted Fixed Overhead} FOH Volume Variance = Absorbed Fixed Overhead − Budgeted Fixed Overhead FOH Volume Variance = ( Actual Units Produced − Budgeted Units Produced ) × O A R unit \text{FOH Volume Variance} = (\text{Actual Units Produced} - \text{Budgeted Units Produced}) \times OAR_{\text{unit}} FOH Volume Variance = ( Actual Units Produced − Budgeted Units Produced ) × O A R unit
Sub-dividing Volume Variance (Hours Base) :
Fixed Overhead Capacity Variance : Measures whether factory facilities operated for more or fewer hours than budgeted. FOH Capacity Variance = ( A H worked − Budgeted Hours ) × O A R hour \text{FOH Capacity Variance} = (AH_{\text{worked}} - \text{Budgeted Hours}) \times OAR_{\text{hour}} FOH Capacity Variance = ( A H worked − Budgeted Hours ) × O A R hour
Fixed Overhead Efficiency Variance : Measures productivity during hours worked. FOH Efficiency Variance = ( S H − A H worked ) × O A R hour \text{FOH Efficiency Variance} = (SH - AH_{\text{worked}}) \times OAR_{\text{hour}} FOH Efficiency Variance = ( S H − A H worked ) × O A R hour
Check Formula Integrity : FOH Volume Variance = FOH Capacity Variance + FOH Efficiency Variance \text{FOH Volume Variance} = \text{FOH Capacity Variance} + \text{FOH Efficiency Variance} FOH Volume Variance = FOH Capacity Variance + FOH Efficiency Variance
Fixed Overhead Variances: Marginal Costing Context
Under marginal costing, fixed overheads are not absorbed into product cost cards; they are treated entirely as period expenses. Consequently:
No Fixed Overhead Volume Variance exists.
No Capacity or Efficiency Fixed Overhead Variances exist.
Only Fixed Overhead Expenditure Variance is calculated : Budgeted Fixed Overhead − Actual Fixed Overhead \text{Budgeted Fixed Overhead} - \text{Actual Fixed Overhead} Budgeted Fixed Overhead − Actual Fixed Overhead .
Sales Variances
Sales variances evaluate revenue deviations. Unlike cost variances (where lower spending is Favourable), for sales variances, higher revenue or higher volume sold is Favourable .
1. Sales Price Variance
Measures the revenue impact of selling actual units at a price different from standard price. Sales Price Variance = Actual Quantity Sold × ( Actual Selling Price − Standard Selling Price ) \text{Sales Price Variance} = \text{Actual Quantity Sold} \times (\text{Actual Selling Price} - \text{Standard Selling Price}) Sales Price Variance = Actual Quantity Sold × ( Actual Selling Price − Standard Selling Price )
Favourable (F) : Actual Selling Price > Standard Selling Price.
Adverse (A) : Actual Selling Price < Standard Selling Price.
2. Sales Volume Variance
Measures the profit or contribution impact of selling a different quantity than budgeted.
Under Absorption Costing (Valued at Standard Profit Margin per Unit): Sales Volume Variance (Absorption) = ( Actual Quantity Sold − Budgeted Quantity Sold ) × Standard Profit per Unit \text{Sales Volume Variance (Absorption)} = (\text{Actual Quantity Sold} - \text{Budgeted Quantity Sold}) \times \text{Standard Profit per Unit} Sales Volume Variance (Absorption) = ( Actual Quantity Sold − Budgeted Quantity Sold ) × Standard Profit per Unit
Under Marginal Costing (Valued at Standard Contribution per Unit): Sales Volume Variance (Marginal) = ( Actual Quantity Sold − Budgeted Quantity Sold ) × Standard Contribution per Unit \text{Sales Volume Variance (Marginal)} = (\text{Actual Quantity Sold} - \text{Budgeted Quantity Sold}) \times \text{Standard Contribution per Unit} Sales Volume Variance (Marginal) = ( Actual Quantity Sold − Budgeted Quantity Sold ) × Standard Contribution per Unit
Worked Comprehensive Example
Budgeted Data for Beta Ltd:
- Budgeted Production & Sales: 4,000 units
- Budgeted Labour Hours: 8,000 hours (2 hours/unit)
- Budgeted Fixed Overhead: £40,000 (OAR = £10.00 per unit or £5.00 per hour)
- Standard Selling Price: £50 per unit
- Standard Variable Cost: £30 per unit (Standard Contribution = £20/unit; Standard Profit = £10/unit)
Actual Results :
- Actual Production & Sales: 4,200 units
- Actual Labour Hours Worked: 8,100 hours
- Actual Fixed Overhead Incurred: £41,500
- Actual Selling Price: £52 per unit
- Variance Calculations
Sales Price Variance :
4 , 200 actual units × ( £ 52 − £ 50 ) = £ 8 , 400 Favourable (F) 4,200 \text{ actual units} \times (£52 - £50) = £8,400 \text{ Favourable (F)} 4 , 200 actual units × ( £52 − £50 ) = £8 , 400 Favourable (F)
Sales Volume Variance (Absorption Costing) :
( 4 , 200 − 4 , 000 ) × £ 10 standard profit = £ 2 , 000 Favourable (F) (4,200 - 4,000) \times £10 \text{ standard profit} = £2,000 \text{ Favourable (F)} ( 4 , 200 − 4 , 000 ) × £10 standard profit = £2 , 000 Favourable (F)
Sales Volume Variance (Marginal Costing) :
( 4 , 200 − 4 , 000 ) × £ 20 standard contribution = £ 4 , 000 Favourable (F) (4,200 - 4,000) \times £20 \text{ standard contribution} = £4,000 \text{ Favourable (F)} ( 4 , 200 − 4 , 000 ) × £20 standard contribution = £4 , 000 Favourable (F)
Fixed Overhead Expenditure Variance :
£ 40 , 000 budgeted − £ 41 , 500 actual = £ 1 , 500 Adverse (A) £40,000 \text{ budgeted} - £41,500 \text{ actual} = £1,500 \text{ Adverse (A)} £40 , 000 budgeted − £41 , 500 actual = £1 , 500 Adverse (A)
Fixed Overhead Volume Variance (Absorption Costing) :
( 4 , 200 actual units − 4 , 000 budgeted units ) × £ 10.00 = £ 2 , 000 Favourable (F) (4,200 \text{ actual units} - 4,000 \text{ budgeted units}) \times £10.00 = £2,000 \text{ Favourable (F)} ( 4 , 200 actual units − 4 , 000 budgeted units ) × £10.00 = £2 , 000 Favourable (F)
FOH Volume Sub-variances (Hours Base) :
S H = 4 , 200 units × 2 hrs = 8 , 400 SH SH = 4,200 \text{ units} \times 2 \text{ hrs} = 8,400 \text{ SH} S H = 4 , 200 units × 2 hrs = 8 , 400 SH
O A R hour = £ 5.00 / hr OAR_{\text{hour}} = £5.00/\text{hr} O A R hour = £5.00/ hr
Capacity Variance : ( 8 , 100 AH − 8 , 000 BH ) × £ 5.00 = £ 500 Favourable (F) (8,100 \text{ AH} - 8,000 \text{ BH}) \times £5.00 = £500 \text{ Favourable (F)} ( 8 , 100 AH − 8 , 000 BH ) × £5.00 = £500 Favourable (F)
Efficiency Variance : ( 8 , 400 SH − 8 , 100 AH ) × £ 5.00 = £ 1 , 500 Favourable (F) (8,400 \text{ SH} - 8,100 \text{ AH}) \times £5.00 = £1,500 \text{ Favourable (F)} ( 8 , 400 SH − 8 , 100 AH ) × £5.00 = £1 , 500 Favourable (F)
Check : £ 500 (F) + £ 1 , 500 (F) = £ 2 , 000 Favourable Volume Variance £500 \text{ (F)} + £1,500 \text{ (F)} = £2,000 \text{ Favourable Volume Variance} £500 (F) + £1 , 500 (F) = £2 , 000 Favourable Volume Variance
AAT Exam Traps
Exam Trap — Fixed Overhead Volume Variance Sign : When actual output exceeds budgeted output, the Fixed Overhead Volume Variance is FAVOURABLE because the factory produced more units and absorbed extra fixed overheads. Do not confuse this with cost expenditure!