Demystifying Variable Overhead Spending Variance: Your Path to Smart Financial Management
A spending variance represents the gap between the actual expenditure on a particular item and the amount that was budgeted or expected. To fully grasp what variable overhead spending variance entails, it is critical to understand what variable overhead itself is. Variable overheads are operational costs that fluctuate with the level of business activity. For instance, as production output rises or falls, so too do variable overheads.
Typically, overheads are fixed costs, such as administrative expenses, but variable overheads are closely tied to production volumes.
Variable overhead spending variance can be defined as the disparity between the actual costs incurred for variable overhead — which encompasses the expenses of indirect materials in manufacturing — and the budgeted or standard costs.
Key Takeaways
- Precise Measurement: Variable Overhead Spending Variance helps determine the difference between actual variable production overheads and the anticipated costs based on activity levels during a specific period.
- Standards and Metrics: The standard variable overhead rate is often in terms of machine hours or labor hours, depending on how much the production process relies on manual labor or automation.
- Favorable vs Unfavorable: A favorable variance arises when actual expenses for indirect materials are less than the budgeted or standard overhead, while an unfavorable variance means actual costs exceed the budgeted amounts.
Unpacking Variable Overhead Spending Variance
Variable Overhead Spending Variance quantifies the difference between actual production overhead costs and what those costs should have been, according to the period’s level of output.
Typically, the standard variable overhead rate is measured in the number of machine or labor hours utilized in production, aligning with the company’s mix of manual and automated processes.
Costs such as paint and consumable materials like oil and grease fall under indirect materials relevant to variable overhead. When these material costs are below the budgeted costs, it indicates a favorable variance. Conversely, higher actual costs indicate an unfavorable variance.
Variable production overheads generally include costs not directly attributable to a specific unit of output. Direct costs, such as materials and labor, typically correlate directly with production quantities.
Real-World Example of Variable Overhead Spending Variance
Consider a case where the actual labor hours are 140. The budgeted overhead rate is $8.40 per labor hour while the actual variable overhead rate stands at $7.30 per labor hour. Here’s how the calculation unfolds:
Standard Variable Overhead Rate $8.40 − Actual Variable Overhead Rate $7.30 = $1.10
Difference Per Hour = $1.10 × Actual Labor Hours 140 = $154
Variable Overhead Spending Variance = $154
In this scenario, the variance is favorable due to actual costs being lower than budgeted. Favorable variances might result from economies of scale, bulk purchasing discounts, cheaper supplies, robust cost control mechanisms, or errors in budget prediction.
Unfavorable variances can signal increases in indirect labor costs, ineffective cost controls, or oversights in budgetary planning.
Quick Insights
Variable overhead spending variance essentially captures the gap between actual variable production overhead costs and anticipated costs, providing insight into cost efficiency and financial accuracy over a given period.
Related Terms: Indirect materials, Cost variance, Budgeted costs, Standard cost, Labor hours.
