Variable Overhead Spending Variance

What is Variable Overhead Spending Variance?

Spending variance is a term used to describe the difference between the real amount associated with a certain expense and the expected amount associated with the same expense. It is the relation of the budgeted costs as calculated by the cost accountants of a company versus the real cost. The budgeted costs are known as variable overheads.

Variable overhead spending variance is essentially the cost associated with running a business that varies with fluctuations in operational activity. As production output levels increase or decrease, variable overheads also vary, usually in direct proportion.

For a given level of production output for a product over a given period of time, the variable overhead spending variance is basically the difference between what the variable production overheads were supposed to cost and how much they actually ended up costing.

Variable overhead spending can be an important indicator when comparing different forms of accounting, inventory management, outsourcing certain aspects of the business (such as handling and shipping), or even when testing out new suppliers.

Variable Overhead Spending Variance – Mathematical Expression

The standard variable overhead rate can be expressed in terms of the number of hours worked. It may include either total machine hours or labor hours, or both. Depending on the kind of production, considerations such as whether the production process is carried out manually or by automation, or as a combination of both, become important. Companies usually use a combination of manual and automated processes in production operations. As a basis for the standard or budgeted rate, they use both machine hours and labor hours.

The calculated variable overhead spending variance may be classified as favorable and non-favorable. If the difference is positive, it is said to be favorable. It implies that the actual costs of consumables such as oil and grease are lower than what was accounted for. The consumables come under the category of indirect materials.

A favorable variance may be observed in cases where economies of scale are used to advantage to obtain bulk discounts for materials, or when efficient cost control measures are put in place by the management.

If the difference is negative, it is said to be unfavorable. It means that the actual costs turned out to be higher than the budgeted costs. An unfavorable variance may be observed in cases where the cost of indirect labor increases, or when cost control measures prove to be ineffective, or when mistakes are made while planning the budget.

Variable Overhead Spending Variance – Example

Assume that during the month of June, the actual labor hours used in Factory A are 100, the actual variable overhead rate is $10 per machine hour, and the budgeted variable overhead rate is $12 per machine hour. The variable overhead spending variance can be calculated in the following manner:

Standard Variable Overhead Rate ($12) − Actual Variable Overhead Rate ($10) = $2

Difference per Hour = $10 x Actual Labor Hours (100) = $1,000

Variable Overhead Spending Variance = $1,000

In such a situation, the variance is said to be favorable because the actual costs are less than the budgeted costs.

Related Readings

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA®) certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

• Accounting Salary Guide
• Inventoriable Costs
• Fixed and Variable Costs
• Variance Analysis Template
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