What Is Overhead Variance?

Managers acknowledge that it is impossible to exactly attain budgeted estimates, such as targeted profits. A variance is a difference between the actual figures and budgeted estimates. Overhead variance arises due to the differences between actual overhead variances and the budgeted or the absorbed variances. Actual overhead variances are those that have been incurred and can be known at the end of a particular accounting period after the accounts have been prepared. Absorbed overheads are overheads charged to a product based on a predetermined overhead rate, which is the standard overhead absorption rate.

Fixed Volume Overhead Variance

It measures the difference between the budgeted and the actual level of activity valued at the standard fixed cost per unit. The fixed overhead volume variance is obtained by subtracting actual units produced from budgeted units and then multiplying the result with standard fixed cost per unit. The standard fixed cost per unit is obtained by dividing the budgeted fixed overhead by the budgeted production. It can also be obtained by subtracting actual hours incurred in production from the budgeted hours and then multiplying the result with the standard fixed cost per hour. The variance can be favorable or adverse. It is favorable when the actual units produced are more than the budgeted units and adverse when the number of units produced are less than the budgeted.

Fixed Expenditure Overhead Variance

This is the difference between the budgeted fixed overhead expenditure and the actual fixed overhead incurred. It arises due to changes in the cost of fixed overhead during the period. Fixed overhead expenditure variance is calculated by subtracting the actual fixed overhead cost from the budgeted fixed overhead cost. It can be favorable when the budgeted fixed overhead is less than the actual fixed overhead or adverse when the actual costs are more than the budgeted.

Variable Efficiency Overhead Variance

This is the difference between the actual and budgeted variable overhead costs that result from inefficient use of indirect materials and indirect labor. Variable overhead efficiency variance is calculated by subtracting the standard budgeted hours from the actual hours incurred, and then multiplying the result with the standard variable overhead rate. A favorable variance results when the actual hours used are less than the budgeted while an adverse variance results from use of more hours than the budgeted.

Variable Overhead Expenditure Variance

This compares the actual variable overhead for production achieved with the budgeted. It arises due to a fall or rise in overhead spending due to unexpected changes in prices, efficiency or inefficiency in the use of the variable overhead, inaccurate estimates of one or more items containing variable overhead and inadequate control of an item of an overhead cost. It is calculated by deducting the actual variable overhead incurred from a product of standard variable overhead rate and actual hours incurred.

References

Resources

  • "Management Accounting: Analysis and Interpretation"; Jerold L. Zimmerman; 2008

About the Author

Daphne Adams has been writing since 2003, with work published in the “Offshore Investment Magazine ". She holds a Master of Business Administration from the Rotman School of Management, as well as a Bachelor of Arts in media and journalism from Ryerson University.