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 the Fixed Overhead Volume Variance?
The fixed overhead volume variance is the difference between the amount of fixed overhead actually applied to produced goods based on production volume, and the amount that was budgeted to be applied to produced goods. This variance is reviewed as part of the period-end cost accounting reporting package.
The fixed overhead costs that are a part of this variance are usually comprised of only those fixed costs incurred in the production process. Examples of fixed overhead costs are factory rent, equipment depreciation, the salaries of production supervisors and support staff, the insurance on production facilities, and utilities.
Being fixed within a certain range of activity, fixed overhead costs are relatively easy to predict. Because of the simplicity of prediction, some companies create a fixed overhead allocation rate that they continue to use throughout the year. This allocation rate is the expected monthly amount of fixed overhead costs, divided by the number of units produced (or some similar measure of activity level).
Conversely, if a company is experiencing rapid changes in its production systems, as may be caused by the introduction of automation, cellular manufacturing, just-in-time production, and so forth, it may need to revise the fixed overhead allocation rate much more frequently, perhaps on a monthly basis.
When the Fixed Overhead Volume Variance Can Occur
When the actual amount of the allocation base varies from the amount built into the budgeted allocation rate, it causes a fixed overhead volume variance. Examples of situations in which this variance can arise are:
The allocation base is the number of units produced, and sales are seasonal, resulting in irregular production volumes on a monthly basis. This disparity tends to even out over the course of a full year.
The allocation base is the number of direct labor hours, and the company implements new efficiencies that reduce the actual number of direct labor hours used in production.
The allocation base is the number of machine hours, but the company then outsources some aspects of production, which reduces the number of machine hours used.
When the cumulative amount of the variance becomes too large over time, a business should alter its budgeted allocation rate to bring it more in line with actual volume levels.
Example of the Fixed Overhead Volume Variance
A company budgets for the allocation of $25,000 of fixed overhead costs to produced goods at the rate of $50 per unit produced, with the expectation that 500 units will be produced. However, the actual number of units produced is 600, so a total of $30,000 of fixed overhead costs are allocated. This creates a fixed overhead volume variance of $5,000.