Every factory has two kinds of overheads — Fixed Overhead (FOH) (rent, depreciation, factory manager's salary — same whether you make 500 or 5,000 units) and Variable Overhead (VOH) (power, consumables — they move with output). Standard Costing asks: how much overhead should we have absorbed vs. what actually happened? That gap is the Overhead Variance.
Fixed Overhead Variance (FOV) is the big one for exams. It splits into two clean parts: Expenditure Variance (did we spend more or less than budgeted?) and Volume Variance (did we produce more or less than budgeted, causing under/over-absorption?). The Volume Variance itself has two children — Efficiency Variance (did workers use hours well?) and Capacity Variance (did we use the plant to its planned capacity?). Remember the tree: FOV → Expenditure + Volume → Volume → Efficiency + Capacity. A Favourable (F) variance means you absorbed more than actual cost (good). Adverse (A) means under-absorbed (bad).
Variable Overhead Variance (VOV) is simpler — it splits only into Expenditure Variance and Efficiency Variance. There's no Volume Variance for variable overheads because, by definition, variable costs flex with output and there's no under/over-absorption problem like with fixed costs. The key formula: Absorbed Variable OH (= Std hours for actual output × Std rate) minus Actual Variable OH. This is asked frequently as a 10–12 mark problem where you compute all six variances in one go. Always verify your answer: Expenditure + Volume must equal FOV, and Efficiency + Capacity must equal Volume Variance — if these don't reconcile, hunt the error before moving on.