Calculate a fixed-overhead capacity sub-variance
Measure the fixed-overhead effect of actual hours differing from budgeted hours at the standard absorption rate.
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. Topic 4.2 teaches standard costing, the listed material, labour, fixed-overhead and sales variances, their causes and relationships, and evidence-based business decisions. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use Topic 2.1–2.2 cost behaviour, contribution and absorption-costing ideas. In each question, identify the period, actual output, budget and standard before calculating a variance.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
If actual hours are below budgeted hours, the capacity variance is usually…
What you will learn
- Calculate the capacity sub-variance
- Use actual and budgeted activity hours
- Explain capacity-use causes and limits
Compare hours operated with the budget
Fixed-overhead capacity variance = (actual hours − budgeted hours) × standard fixed-overhead absorption rate per hour. More actual hours than planned create a favourable capacity variance under this convention because more fixed overhead is absorbed; fewer hours create an adverse variance.
This measure is distinct from the efficiency sub-variance. It asks how long the facility operated compared with the budgeted hours, not how many hours were needed per unit of actual output.
Capacity variance = (AH − BH) × standard FOH rate/hour
Use relevant evidence about capacity
Downtime, shift patterns, demand, maintenance and supply interruptions can change actual hours. A favourable capacity variance may arise from overtime or operating when demand is weak; it does not prove that the hours were productive or profitable.
Compare actual hours with hours scheduled and the budget assumptions. Include machine condition, workforce welfare and sales evidence before changing shifts or maintenance plans.
Pause and explain
AH is 9,500; BH is 9,000; standard rate is $12/hour. What is the capacity variance?
Worked example
Budgeted activity is 8,000 hours and actual activity is 7,600 hours. Standard fixed-overhead rate is $18 per hour. Calculate the capacity variance.
Show the worked solution
- Actual hours are 400 below budget.
- 400 × $18 = $7,200.
- Fewer hours mean lower absorption, so the variance is adverse.
Answer $7,200 adverse fixed-overhead capacity variance.
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Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Budgeted hours are 6,400, actual hours 6,250, and the standard rate is $25/hour. Calculate the capacity variance.
Give me a hint
Find the hours difference and multiply by the standard rate.
Compare my reasoning
- AH − BH = 6,250 − 6,400 = −150 hours.
- 150 × $25 = $3,750.
- Actual capacity use is below budget, so the result is adverse.
$3,750 adverse.
Look for these in your work
- Hours difference correct
- Rate applied
- Direction correctly labelled
A factory budgeted 5,200 hours but ran for 5,450. Standard fixed overhead is $16/hour. Calculate the capacity variance and one operational check.
Give me a hint
Extra hours create additional absorption but may not be productive.
Compare my reasoning
- Extra hours = 5,450 − 5,200 = 250.
- 250 × $16 = $4,000 favourable.
- Check whether the extra shifts produced saleable output and whether overtime or maintenance costs increased.
$4,000 favourable; check output, demand and the cost/condition of extra shifts.
Look for these in your work
- 250 hours identified
- Variance equals $4,000 F
- Operational qualification included
A hospital's capacity variance is adverse because fewer operating-theatre hours were available after equipment failure. What should not be inferred from this financial result?
Give me a hint
It does not show that clinicians worked inefficiently or that care quality fell.
Compare my reasoning
- The result records lower hours relative to budget.
- Equipment downtime is a possible capacity cause, separate from staff efficiency.
- Check maintenance logs, deferred cases, patient safety and recovery planning before deciding staffing changes.
Do not infer poor clinical efficiency or staff effort from the capacity variance. Investigate equipment downtime, service access and safety separately.
Look for these in your work
- Capacity meaning stated
- Cause separated from staff efficiency
- Service and safety checks included
Common mistakes
- Using standard hours allowed for actual output instead of budgeted hours
- Calling more hours automatically efficient
- Confusing capacity hours with machine output or labour rate
What can you explain now?
What two activity amounts are compared in a capacity variance?
Compare with the explanation
Actual hours and budgeted hours
The capacity part compares time operated with budgeted time.
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Make it stick
How does capacity variance differ from efficiency variance?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.