Variable overhead spending variance

Variable Overhead Spending Variance Overview

The variable overhead spending variance is the difference between the actual and budgeted rates of spending on variable overhead. The variance is used to focus attention on those overhead costs that vary from expectations. The formula is:

Actual hours worked x (Actual overhead rate - standard overhead rate)
= Variable overhead spending variance

A favorable variance means that the actual variable overhead expenses incurred per labor hour were less than expected.

The variable overhead spending variance is a compilation of production expense information submitted by the production department and the projected labor hours to be worked, as estimated by the industrial engineering and production scheduling staffs, based on historical and projected efficiency and equipment capacity levels.

There are a number of possible causes of a variable overhead spending variance. For example:

  • Account misclassification. The variable overhead category includes a number of accounts, some of which may have been incorrectly classified and so do not appear as part of variable overhead (or vice versa).

  • Outsourcing. Some activities that had been sourced in-house have now been shifted to a supplier, or vice versa.

  • Supplier pricing. Suppliers have changed their prices, which have not yet been reflected in updated standards.

The variable overhead spending concept is most applicable in situations where the production process is tightly controlled, as is the case when large numbers of identical units are produced.

The other component of the total variable overhead variance is the variable overhead efficiency variance.

Variable Overhead Spending Variance Example

The cost accounting staff of Hodgson Industrial Design calculates, based on historical and projected cost patterns, that the company should experience a variable overhead rate of $20 per labor hour worked, and builds this figure into the budget. In April, the actual variable overhead rate turns out to be $22 per labor hour. During that month, production employees work 18,000 hours. The variable overhead spending variance is:

18,000 Actual hours worked x ($22 Actual variable overhead rate - $20 Standard overhead rate)
= $36,000 Variable overhead spending variance

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Cost Accounting Fundamentals