In an expanded overhead variance, the variable overhead variance is composed of the:

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What Is Variable Overhead Efficiency Variance

Variable overhead efficiency variance refers to the difference between the true time it takes to manufacture a product and the time budgeted for it, as well as the impact of that difference. It arises from variance in productive efficiency.

For example, the number of labor hours taken to manufacture a certain amount of product may differ significantly from the standard or budgeted number of hours. Variable overhead efficiency variance is one of the two components of total variable overhead variance, the other being variable overhead spending variance.

Understanding Variable Overhead Efficiency Variance

In numerical terms, variable overhead efficiency variance is defined as:

VOEV = ( ALH − BLH ) × Hourly Rate where: VOEV = Variable overhead efficiency variance ALH = Actual labor hours BLH = Budgeted labor hours Hourly Rate = Rate for standard variable overhead \begin{aligned} &\text{VOEV} = ( \text{ALH} - \text{BLH} ) \times \text{Hourly Rate} \\ &\textbf{where:} \\ &\text{VOEV} = \text{Variable overhead efficiency variance} \\ &\text{ALH} = \text{Actual labor hours} \\ &\text{BLH} = \text{Budgeted labor hours} \\ &\text{Hourly Rate} = \text{Rate for standard variable overhead} \\ \end{aligned} ​VOEV=(ALH−BLH)×Hourly Ratewhere:VOEV=Variable overhead efficiency varianceALH=Actual labor hoursBLH=Budgeted labor hoursHourly Rate=Rate for standard variable overhead​

The hourly rate in this formula includes such indirect labor costs as shop foreman and security. If actual labor hours are less than the budgeted or standard amount, the variable overhead efficiency variance is favorable; if actual labor hours are more than the budgeted or standard amount, the variance is unfavorable.

Example of Variable Overhead Efficiency Variance

Consider an example of a widget-manufacturing plant, where the rate for standard variable overhead to account for indirect labor costs is estimated at $20 per hour. Assume that the standard number of hours required to manufacture 1,000 widgets is 2,000 hours. However, the company actually took 2,200 hours to manufacture 1,000 widgets. In this case, the unfavorable variable overhead efficiency variance is (2,200 – 2,000) x $20 = $4,000; the variance is unfavorable because the company took more time than budgeted to produce the 1,000 widgets. If the company had instead taken 1,900 hours to manufacture 1,000 widgets, the variance would be favorable $2,000.

What Is Variable Overhead Spending Variance?

A spending variance is the difference between the actual amount of a particular expense and the expected (or budgeted) amount of an expense. To understand what variable overhead spending variance is, it helps to know what a variable overhead is. Variable overhead is a cost associated with running a business that fluctuates with operational activity. As production output increases or decreases, variable overheads move in tandem. Overheads are typically a fixed cost, for example, administrative expenses. Variable overheads, on the other hand, are tied to production levels.

Variable overhead spending variance is the difference between actual variable overhead cost, which is based on the costs of indirect materials involved in manufacturing, and the budgeted costs called the standard variable overhead costs.

Key Takeaways

• Variable Overhead Spending Variance is the difference between what the variable production overheads actually cost and what they should have cost given the level of activity during a period.
• The standard variable overhead rate is typically expressed in terms of machine hours or labor hours.
• Variable overhead spending variance is favorable if the actual costs of indirect materials are lower than the standard or budgeted variable overheads.
• Variable overhead spending variance is unfavorable if the actual costs are higher than the budgeted costs.

Understanding Variable Overhead Spending Variance

Variable Overhead Spending Variance is essentially the difference between what the variable production overheads actually cost and what they should have cost given the level of activity during a period.

The standard variable overhead rate is typically expressed in terms of the number of machine hours or labor hours depending on whether the production process is predominantly carried out manually or by automation. A company may even use both machine and labor hours as a basis for the standard (budgeted) rate if the use both manual and automated processes in their operations.

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.

Variable production overheads include costs that cannot be directly attributed to a specific unit of output. Costs such as direct material and direct labor, on the other hand, vary directly with each unit of output.

Example of Variable Overhead Spending Variance

Let's say that actual labor hours used are 140, the standard or budgeted variable overhead rate is $8.40 per direct labor hour and the actual variable overhead rate is $7.30 per direct labor hour. The variable overhead spending variance is calculated as below:

Standard variable overhead Rate $8.40 − Actual Variable Overhead Rate $7.30 =$1.10

Difference Per Hour = $ 1.10 × Actual Labor Hours 140 = $154

Variable Overhead Spending Variance = $154

In this case, the variance is favorable because the actual costs are lower than the standard costs.

A favorable variance may occur due to economies of scale, bulk discounts for materials, cheaper supplies, efficient cost controls, or errors in budgetary planning.

An unfavorable variance may occur if the cost of indirect labor increases, cost controls are ineffective, or there are errors in budgetary planning.

Limitations

Fast Fact

Variable overhead spending variance is essentially the difference between the actual cost of variable production overheads versus what they should have cost given the output during a period.

What is variable overhead variance?

How is the variable overhead efficiency variance calculated?

What is the variable overhead efficiency variance?

What are the two variances for variable overhead?