Variable overhead spending variance

Variable overhead spending variance (also known as variable overhead rate variance and variable overhead expenditure variance) is the difference between actual variable manufacturing overhead incurred and actual hours worked during the period multiplied by standard variable overhead rate.

If actual variable manufacturing overhead is more than the actual hours worked at standard rate, the variable overhead spending variance would be favorable and if actual variable manufacturing overhead is less than actual hours worked at standard rate, the variable overhead spending variance would be unfavorable.

Formula

Variable overhead spending variance is computed by using the following formula:

Variable overhead spending variance = (Actual hours worked × Actual variable overhead rate) – (Actual hours worked × Standard variable overhead rate)

The above formula can be factored as as follows:

Variable overhead spending variance = AH × (AR – SR)

Where;

  • AH = Actual hours worked during the period
  • AR = Actual variable overhead rate rate
  • SR = Standard variable overhead rate (i.e., variable portion of predetermined overhead rate)
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Example

The SK Manufacturing company has the following data for the month of January 2018:

  • Actual variable manufacturing overhead: $75,000
  • Standard variable manufacturing overhead rate: $12 per hour
  • Actual hours worked during January: 6,000 hours

Required: Using above information, compute variable overhead spending variance of SK manufacturing company for the month of January.

Solution:

Variable overhead spending variance = (Actual hours worked × Actual variable overhead rate) – (Actual hours worked × Standard variable overhead rate)
= $75,000* – (6,000 hours × $12.00)
= $75,000 – $72,000
= $3,000 Unfavorable

*Actual hours worked × Actual variable overhead rate = Actual variable overhead for the period

We can also compute the variance using factored formula as follows:

Variable overhead spending variance = AH × (AR – SR)
= 6,000 hours × ($12.50* – $12.00)
= 6,000 hours × $0.50
= $3,000 Unfavorable

*Actual variable manufacturing overhead rate: $75,000/6,000 hours

The variable overhead spending variance is unfavorable because the actual variable manufacturing overhead rate ($12.5) is higher than the standard variable manufacturing overhead rate ($12).

Causes of variable overhead spending variance

Causes of favorable variance

A favorable variable overhead spending variance may be the result of one or more of the following reasons:

  • A sudden decrease in the prices of indirect materials or the rates of indirect labor that were not expected at the time of setting overhead standards.
  • Discount on purchase of indirect materials and supplies because of large order sizes.
  • A more efficient use of fuel and power resources in production facility. For example, the installation of latest energy efficient equipment in the factory can result in a more optimized consumption of electricity.

Causes of unfavorable variance

The usual causes of an unfavorable variable overhead spending variance are as follows:

  • The increase in indirect labor because of a sudden rise in the minimum wage rate in the region.
  • The use of inefficient or unoptimized machines and equipment.
  • Use of unskilled or poorly motivated workers which may result in the wastage of indirect materials and supplies.
  • A sudden increase in the rate of indirect materials or other components of variable manufacturing overhead.

Responsibility of the variance:

The production department is usually responsible for unfavorable variable overhead spending variance.

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