Controlling overhead costs is more difficult and complex than controlling direct materials and direct labor costs. This is because the responsibility for overhead costs is difficult to pin down. Show
Total overhead cost variance can be subdivided into budget or spending variance and efficiency variance. Budget or spending variance is the difference between the budget and the actual cost for the actual hours of operation. This variance can be compared to the price and quantity variance developed for direct materials and direct labor. Budget or spending variance measures the following:
By contrast, efficiency variance measures efficiency in the use of the factory (e.g., machine hours employed in costing overheads to the products). Formulas to Calculate Overhead VariancesThe formulas that are useful for calculating different overhead variances are as follows: Standard rate per unit = Budgeted overheads / Budgeted output Standard rate per hour = Budgeted overheads / Budgeted hours Standard hours for actual output = (Budgeted output / Budgeted hours) x Actual output Standard output for actual time = (Budgeted output / Budgeted hours) x Actual output Recovered or absorbed overheads = Standard rate x Actual output Budgeted overheads = Standard rate per unit x Budgeted output Or = Standard rate per hour x Budgeted hours Standard overheads = Standard rate per unit x Standard output for actual time or = Standard rate per hour x Actual hours Actual Overheads = Actual rate per unit x Actual output or = Actual rate per unit x Actual hours The different overhead variances can now be specified as follows: Total overhead cost variance = Recovered overheads – Actual overheads The total overhead cost variance may be separated into:
Fixed overhead cost variance consists of:
Volume variance further consists of:
Causes of Overhead VarianceThe main causes of overhead variances are described in this section. Fixed Overhead Expenditure Variance: Spending more money than budgeted. ExampleThis example provides an opportunity to practice calculating the overhead variances that have been analyzed up to this point. For XYZ Company for the month of October, calculate the various overhead variances from the following information:
SolutionBudgeted overhead = $60,000 The total overhead cost variance can be analyzed into a budgeted or spending variance and a volume variance. Namely: Overhead spending variance = Budgeted overheads – Actual overheads Overhead volume variance = Recovered overheads – Budgeted overheads Frequently Asked QuestionsWhat is a spending variance ?Budget or spending variance is the difference between the budget and the actual cost for the actual hours of operation. This variance can be compared to the price and quantity variance developed for direct materials and direct labor. What does a spending variance measure?Budget or spending variance measures the following: - the differences between the standard prices and the actual prices of manufacturing overhead materials and services - the difference between the standard and actual quantities used What are the formulas to calculate the overhead variances?The formulas that are useful for calculating different overhead variances are as follows: standard rate per unit = budgeted overheads / budgeted output standard rate per hour = budgeted overheads / budgeted hours standard hours for actual output = (budgeted output / budgeted hours) x actual output standard output for actual time = (budgeted output / budgeted hours) x actual output recovered or absorbed overheads = standard rate x actual output budgeted overheads = standard rate per unit x budgeted output How do we calculate the total overhead cost variance?The total overhead cost variance may be separated into: variable overhead cost variance = recovered variable overheads – actual variable overheads fixed overhead cost variance = recovered fixed overheads – actual fixed overheads What are the causes of an overhead variance?The main causes of overhead variances are: - fixed overhead expenditure variance - fixed overhead volume variance - fixed overhead efficiency - capacity variance About the Author True Tamplin, BSc, CEPF®True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists. True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics. To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.
What are the causes of overhead variances?Reason for Overhead Expenditure Variance. Change in price of indirect material and labor.. Non-availability of specified services.. Change in efficiency in use of services.. Over or under utilization of services.. Change in production methods.. Improper use of available facilities.. Ineffective control in spending.. What is overhead variance?Overhead variance refers to the difference between actual overhead and applied overhead. You can only compute overhead variance after you know the actual overhead costs for the period. Overhead is applied based on a predetermined rate and a cost driver.
What is overhead variance with example?Variable overhead spending variance is favorable if the actual costs of indirect materials — for example, paint and consumables such as oil and grease—are lower than the standard or budgeted variable overheads. It is unfavorable if the actual costs are higher than the budgeted costs.
What is the overhead variance formula?It can be calculated using the following formula: Fixed Overhead Volume Variance = Applied Fixed Overheads – Budgeted Fixed Overhead. Here, Applied Fixed Overheads = Standard Fixed Overheads × Actual Production.
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