(38).---OVERHEAD COST VARIANCES.

Variable overhead variances.

The total variable overhead variance is the difference between standard variable overheads charged to production and the actual variable overheads incurred.
It is normally assumed that variable overheads vary with direct labour hours of input and that total variable overhead variance will therefore, be due to one or both of the following;

• Actual expenditure may be different form budgeted expenditure.
• The actual direct labour hours of input may be different form the direct labour hours input which should have been used.

The reasons give rise to the two sub variances;

• Variable overhead expenditure variance
• Variable overhead efficiency variance

Variable overhead Expenditure variance
To compare the actual overhead expenditure which the budgeted expenditure it is necessary to flex the budget. It is assumed that variable overhead will vary with direct labour hours of input and therefore, the budget is fixed on this basis.

Variable overhead Efficiency variance
The variable overhead efficiency variance is the difference between the standard hour of output and the actual hours of input for the period multiplied by the standard variable overhead rate.

Fixed Production overhead variances.

You keep in maid the whole time the fact that you are trying to explain the reasons for any under or over absorption fixed production overhead. Remember that the absorption rate is calculated as follows:
Overhead absorption rate =Budgeted fixed production overhead / Budgeted level of actively.
If either the numerator or the denominator or both in the absorption rate calculation are incorrect than we will have under-or over-absorption production overhead.

• The fixed production overhead expenditure variance measure the under or over absorption caused by the actual production overhead expenditure betting different from budget, that is the numerator being incorrect.
• The fixed production overhead volume variance measures the under or over absorption caused by the actual production or hours of activity being different from the budgeted production or budgeted number of hours used in calculating the absorption rate.

Fixed production overhead Expenditure or Spending variance
This variance seeks to identify that portion of the total fixed overhead variance which is due to actual fixed overhead expenditure differing from the budgeted fixed overhead expenditure.

Volume variance
This variance seeks to identify that portion of the total fixed overhead variance which is due to actual production being different from budgeted production. If the actual production is less than the budgeted production, the fixed overhead changed to production will be less than budgeted cost & the volume variance will be adverse variance. The difference between actual production & the budgeted production for a period multiplied by the standard fixed overhead rate.
Sum of these factors may be controllable by production or sales management while other may not. If we wish to identify the reasons for the volume variance we may ask why the actual production was different from the budgeted production. It could be due to two reasons,

• Labour force worked at a different level of efficiency from that which was anticipated in the budget , & /or
• The company had failed to utilize the planned capacity

The two reasons relate to the two sub variances of the total volume variances;

Volume efficiency varianceThe volume efficiency variance is the difference between the standard hours of output (SH) & the actual hours of input (AH) for the period multiplied by the standard fixed overhead rate (SR) , or
Physical content of this variance is a measure of labour efficiency & is identical to the labour efficiency variance. Consequently, the reasons for this variance will be identical to labour efficiency variance.

Volume capacity variance
The volume capacity variance is the between the actual hours of input (AH) & the budgeted hours of input for the period multiplied by the standard fixed overhead rate (SR) , or volume efficiency variance indicates a failure to utilize capacity efficiently, the volume capacity variance indicates a failure to utilize capacity at all.