Variable Overhead Expenditure Variance

Quick Summary of Variable Overhead Expenditure Variance

The variable overhead expenditure variance is the difference between the actual and budgeted rates of spending on variable overhead.

The variable overhead spending variance is the difference between the actual and budgeted rates of spending on variable overhead. The variance is used to draw attention to the overhead costs that differ from expectations. The formula is as follows:

Actual hours worked x (Actual overhead rate – standard overhead rate) = Variable overhead spending variance

The only alternative to the vertical balance sheet format is the horizontal balance sheet, which displays assets first and liabilities and shareholders’ equity second. Each column’s totals should always be the same in this style.

The vertical balance sheet format is significantly more popular than the horizontal balance sheet style because it allows for the presentation of several balance sheets on a single page, employing a side-by-side presentation arrangement that may span a large number of reporting periods.

A positive variance indicates that the actual variable overhead expenses incurred per labour hour were lower than anticipated.

The variable overhead spending variance is a combination of production expense data submitted by the production department and projected labour hours to be worked as estimated by the industrial engineering and production scheduling staffs based on historical and projected efficiency and equipment capacity levels.

A variable overhead spending variance can be caused by a number of factors. As an example:

• Account misclassification. The variable overhead category includes a number of accounts, some of which may have been incorrectly classified and so do not appear as part of variable overhead (or vice versa).
• Outsourcing. Some activities that had been sourced in-house have now been shifted to a supplier, or vice versa.
• Supplier pricing. Suppliers have changed their prices, which have not yet been reflected in updated standards.

The variable overhead spending concept is most useful when the production process is tightly controlled, as when a large number of identical units are produced.

The variable overhead efficiency variance is the other component of the total variable overhead variance.

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