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. 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). The formulas that are useful for calculating different overhead variances are as follows: Or Or Or 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: The main causes of overhead variances are described in this section. Fixed Overhead Expenditure Variance: Spending more money than budgeted. Fixed Overhead Volume Variance: Change in demand, interruption or stoppage of work due to defective planning, shortage of materials, absence of or faulty instructions, etc. Fixed Overhead Efficiency: Actual operational efficiency is not in line with expectations. Capacity Variance: Change in the utilization of capacity due to low demand, lack of power, and raw materials shortages, among other factors. This 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: Budgeted overhead = $60,000 Recovered overhead = Standard rate per hour x Standard hours for actual output = 2 x 22,000 = $44,000 Standard overhead = Standard rate per hour x Actual hours = 2 x 20,000 = $40,000 Overhead cost = Recovered overhead - Actual overhead variance = 44,000 - 62,000 = 18,000 (unfavorable) 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 = 60,000 - 62,000 = 2,000 (Unfavorable) Overhead volume variance = Recovered overheads - Budgeted overheads = 44,000 - 60,000 = 16,000 (Unfavorable)
Formulas to Calculate Overhead Variances
Causes of Overhead Variance
Example
Solution
Overhead Variances FAQs
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: - 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
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
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
The main causes of overhead variances are: - fixed overhead expenditure variance - fixed overhead volume variance - fixed overhead efficiency - capacity variance
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