[ Music ] >> So, as you can see the fixed cost variance calculations are much simpler than the variable cost variances. But, we're not going to get away with things that easy. For fixed cost variances there is a different variance that many companies use. It's called the production volume variance. And, what it represents is a different, difference than what we've been calculating thus far. The difference between the budgeted, or expected overhead and overhead that is estimated during an accounting period. What we've been doing thus far is looking at budgeted, or expected, or standard information compared to what actually happened. But, as you recall from earlier module, we estimate overhead throughout an accounting period to help facilitate decisions. Some firms will calculate a variance between how much has been estimated and what was originally budgeted at the beginning of the period. Depending on the time period we're talking about, not all firms calculate this. But, just in case, here's a bit of background about the production volume variance. The calculation actually depends on how overhead is estimated, or how it's applied. And, there are differences between what we're talking about, a standard costing system, and other costing systems. Specifically, what's generally referred to as a normal costing system. These get a little bit confusing but, just keep in mind that the calculations are basically comparing the budgeted overhead which is created at the beginning of the accounting period, and that which is estimated throughout. Let's turn to our example to explore this idea a little bit more. -- - So, the first step we have to perform in order to calculate the production volume variance is figure out what predetermined overhead rate was calculated. We were told, at the beginning of the accounting period, that we would expect $16,625 in fixed overhead costs. Now, we divvy that up over our units of cost driver, and we were told that we can expect one machine hour for each unit that we produce, and that we are supposed to produce 4,750 units of output. That comes out to be $3.50 per machine hour [writing]. Now, the second step is to actually estimate overhead, and when we estimate overhead there are multiple choices that we have to do. -- Under a standard costing system we estimate, or apply overhead in the following manner. We use the predetermined overhead rate of $3.50 per machine hour, and we multiply that by however many machine hours we should have used given what we actually produced. That's one machine hour, per output, and we were told that we actually produced 4,250 units of output. So, our applied overhead throughout the accounting period is, $14,875. So now we're able to calculate the difference between the amount of overhead that we budgeted at the beginning of the year, and that which we have estimated throughout the accounting period. And, that would be the difference between $14,875 applied, or estimated overhead, and the $16,625 of budgeted overhead. In this case, we calculate a variance of $1,750. Under a different costing system, namely a normal costing system, we estimate to our applied overhead a bit differently. We actually take the same predetermined overhead rate of $3.50 per machine hour, and we use the actual number of machine hours that we used throughout the accounting period to estimate the overhead. This is different than the standard costing system which used the number of machine hours that we were supposed to use given our actual production volume. But this, we go right to the number of machine hours that we actually used, under a normal costing system. That $3.50 per machine hour would be multiplied by the actual number of machine hours used which was given to us as 4,700 machine hours. That yields an estimated overhead of $16,450, and, the difference between that version of applied overhead and the budgeted amount of $16,625 is $175. This would be the production volume variance calculated under a normal costing system. Now, firms choose whether they adopt a standard costing system or a normal costing system. And, as we've talked about a lot, many factors influence what choice of costing system a firm makes. But, regardless of choice, you can always calculate the production volume variance. Again, the difference between the predetermined budgeted of total amount of overhead, and that which is been applied, or estimated throughout the accounting period.