Variable Overhead Spending Variance: Definition, Calculation, and Examples

An in-depth look at variable overhead spending variance, including its definition, calculation methods, significance, examples, and frequently asked questions.

Variable overhead spending variance refers to the difference between the actual variable overhead costs incurred during a period and the standard or budgeted variable overhead costs based on expected activity levels. It is a crucial metric for cost control and financial performance analysis in management accounting.

Definition

Variable overhead spending variance can be defined as:

$$ \text{Variable Overhead Spending Variance} = \text{Actual Variable Overheads} - \text{Standard Variable Overheads} $$

where:

• Actual Variable Overheads are the overhead costs observed in practice.
• Standard Variable Overheads are derived based on the budgeted cost rates and actual output or activity levels.

Calculation Method

The calculation of variable overhead spending variance can be expressed as:

$$ \text{Variance} = (\text{Actual Hours} \times \text{Actual Overhead Rate}) - (\text{Actual Hours} \times \text{Standard Overhead Rate}) $$

Significance

Understanding this variance helps organizations in several ways:

• Cost Control: By identifying discrepancies between actual and budgeted costs, businesses can investigate and control unnecessary expenditures.
• Performance Evaluation: It aids in assessing the efficiency of the cost control measures taken by various departments.

3. Budgeting: Insights from the variance analysis can be used to formulate more accurate budgets in future periods.

Examples

Example 1: Positive Variance

If an organization budgeted $5 per labor hour for variable overheads and worked 1,000 hours in a period, the standard cost would be $5,000. If the actual cost incurred was $4,800, the calculation would be:

$$ \text{Variance} = $4,800 - $5,000 = -$200 $$

A negative variance indicates that the actual costs were lower than the budgeted costs, signaling cost efficiency.

Example 2: Negative Variance

Conversely, if the actual cost incurred was $5,200, the variance would be:

$$ \text{Variance} = $5,200 - $5,000 = +$200 $$

A positive variance suggests that the actual costs exceeded the budgeted amounts, indicating an inefficiency that needs to be addressed.

Historical Context

The concept of overhead variance analysis has its roots in the early 20th century, with the development of standard costing systems in industrial management. These systems were designed to streamline cost control and improve financial efficiency.

Applicability

Industries

Variable overhead spending variance is applicable across various industries, especially in manufacturing, where overhead costs can fluctuate with production levels.

Scenarios

• Production Changes: When production levels change, overhead costs are expected to vary proportionally. Monitoring the variance helps in understanding these changes.
• Cost Monitoring: Regular variance analysis helps in keeping track of any deviations from the expected cost levels.

Comparisons

Variable vs. Fixed Overhead Variances

• Variable Overhead Variance: Fluctuates with production volume and is analyzed using the spending and efficiency variances.
• Fixed Overhead Variance: Remains constant irrespective of production volume and is analyzed using the budget variance.

Related Terms

• Overhead Variance: Comprises variances related to both fixed and variable overheads.
• Standard Costing: A control tool that involves setting standard costs and analyzing variances from actual costs.
• Budgeting: The process of creating a plan to spend money that assists in cost management and financial planning.

FAQs

What causes variable overhead spending variance?

Several factors can cause variances, including changes in the cost of indirect materials, labor rate changes, and unexpected increases in utilities or other overhead costs.

How can businesses manage variable overhead spending variance?

By regularly monitoring actual costs against budgeted figures, identifying the root causes of variances, and implementing cost-saving measures.

References

1. Horngren, C. T., Datar, S. M., & Rajan, M. V. (2015). Cost Accounting: A Managerial Emphasis. Pearson Education.
2. Drury, C. (2012). Management and Cost Accounting. Cengage Learning.
3. Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.

Summary

Understanding variable overhead spending variance is essential for organizations aiming to control costs and improve efficiency. By regularly analyzing these variances, businesses can make informed decisions, formulate accurate budgets, and address inefficiencies promptly.