While fixed overheads remain consistent regardless of production levels, variable overheads fluctuate directly to production volumes. These variable overheads can sometimes be elusive, but they significantly impact a firm’s costing and profitability calculations. Spending overhead variance can change due to a change in price, usage, and also efficiency in operation. Price and volume changes are similar to direct material and labor variance analysis.
Overall, the overhead spending variance is crucial to managerial and cost accounting. It contributes to how managers make costing decisions and the analysis of cost management practices. Companies care about calculating their overhead spending variance because it provides insight into how well they control costs, perform, and aid in decision-making.
The variable overhead spending variance emphasizes mainly the variable overhead rate by comparing the actual and the standard rate. The total variable overhead cost variance is also found by combining the variable overhead rate variance and the variable overhead efficiency variance. By showing the total variable overhead cost variance as the sum of the two components, management can better analyze the two variances and enhance decision-making. To determine the overhead standard cost, companies prepare a flexible budget that gives estimated revenues and costs at varying levels of production.
These variances create accountability among employees to take responsibility for any unfavorable variances and find opportunities for improvement. It is still helpful in performance evaluation by declaring the favorable or unfavorable variance. A favorable variance is generally good; a negative variance is generally a sign of overspending or over the budget. The overhead spending variance consists of several components that help break down the factors contributing to the overall variance. These components are essential in understanding the calculation and application of the variance. Variable overhead is an indirect expense that increases as production increases and decreases as production decreases for example diesel oil used in a production plant.
The production expense information is submitted by the production department of the enterprise. The estimated labor hours to meet output requirements are estimated by the staff responsible for industrial engineering and production scheduling. Similarly, increased efficiency can decrease the overhead spending variance and hence the total overhead variance rate. Variable overhead prices are often uncontrollable factors for operational managers; however, changes in prices do also cause a change in the variance.
However, favorable variances only sometimes mean the company is doing something right. If a purchasing department decides to buy production supplies to manufacture their goods, this could be a significant cost-cutting measure. An example of an unfavorable variance creating more profitability for the company will be if a manager decides to either pay their indirect workers more or give out a more significant percentage of sales commission. Knowing how to interpret the favorable and unfavorable variances is essential to making investment decisions and deciding the cost-cutting measures of a company. Regardless, company executives look to this variance to decide pricing, production volume, resource allocation, and more.
Traditional management accounting often define blanket variables such as machine hours or labor hours which seldom provides a meaningful basis of cost control. The use of activity based costing to calculate overhead variances can significantly enhance the usefulness of such variances. Overhead variable spending variance is the difference between the budgeted indirect variable costs and the actual overhead costs incurred. On the contrary, as shown in our example above, an unfavorable variable overhead spending variance would be when the actual variable overhead rate per hour is greater than the standard variable overhead per hour rate.
Variable Overhead Spending Variance is the difference between variable production overhead expense incurred during a period and the standard variable overhead expenditure. The variance is also referred to as variable overhead rate variance and variable overhead expenditure variance. Variable overhead efficiency variance is one of the factors that impact the total variable overhead 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.
The fixed factory overhead variance represents the difference between the actual fixed overhead and the applied fixed overhead. The variance is unfavorable since the actual overhead cost exceeded the budgeted overhead cost. A favorable variance means that the actual variable overhead expenses incurred per labor hour were less than expected. All these lower budgeted expenses are then summed up and a standard cost of variable overheads is calculated. Since Jerry’s uses direct labor hours as the activity
base, the possible explanations for this variance are linked to
efficiencies or inefficiencies in the use of direct labor.
By understanding the causes of favorable variable manufacturing spending variances, businesses can identify successful cost management practices, replicate them, and make informed decisions to optimize overhead costs. Companies can calculate their overall overhead spending variance by considering both the variables of the overhead rate variance and the overhead efficiency variance. The other component of the total variable overhead variance is the variable overhead efficiency variance. 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.
Managers will heavily monitor this variance over time to increase efficiency or profitability. Though the concept of variable overhead rate variance plays a significant role in the costing and assists while making the budgets but it has limitations too which an organization cannot ignore. Moreover, manufacturers must incorporate variable https://accounting-services.net/fixed-overhead-spending-variance-accountingtools/ costs to calculate the total production costs at current levels and the total amount required to increase production in the future. The productivity efficiency variance is the difference between the actual number of labor hours required to manufacture a certain number of a product and the budgeted or standard number of hours.