Controlling overhead costs is more difficult and complex than controlling direct materials and direct labor costs. This is because the responsibility for overhead costs is difficult to pin down.

Total overhead cost variance can be subdivided into budget or spending variance and efficiency variance.

Budget or spending variance is the difference between the budget and the actual cost for the actual hours of operation. This variance can be compared to the price and quantity variance developed for direct materials and direct labor.

Budget or spending variance measures the following:

• The differences between the standard prices and the actual prices of manufacturing overhead materials and services
• The difference between the standard and actual quantities used

By contrast, efficiency variance measures efficiency in the use of the factory (e.g., machine hours employed in costing overheads to the products).

## Formulas to Calculate Overhead Variances

The formulas that are useful for calculating different overhead variances are as follows:

Standard rate per unit = Budgeted overheads / Budgeted output

Standard rate per hour = Budgeted overheads / Budgeted hours

Standard hours for actual output = (Budgeted output / Budgeted hours) x Actual output

Standard output for actual time = (Budgeted output / Budgeted hours) x Actual output

Recovered or absorbed overheads = Standard rate x Actual output

Budgeted overheads = Standard rate per unit x Budgeted output

Or

= Standard rate per hour x Budgeted hours

Standard overheads = Standard rate per unit  x Standard output for actual time

or

= Standard rate per hour x Actual hours

Actual Overheads = Actual rate per unit x Actual output

or

= Actual rate per unit x Actual hours

The different overhead variances can now be specified as follows:

The total overhead cost variance may be separated into:

Fixed overhead cost variance consists of:

Volume variance further consists of:

The main causes of overhead variances are described in this section.

Fixed Overhead Expenditure Variance: Spending more money than budgeted.
Fixed Overhead Volume Variance: Change in demand, interruption or stoppage of work due to defective planning, shortage of materials, absence of or faulty instructions, etc.
Fixed Overhead Efficiency: Actual operational efficiency is not in line with expectations.
Capacity Variance: Change in the utilization of capacity due to low demand, lack of power, and raw materials shortages, among other factors.

## Example

This example provides an opportunity to practice calculating the overhead variances that have been analyzed up to this point.

For XYZ Company for the month of October, calculate the various overhead variances from the following information:

• Normal overhead rate = \$2
• Actual hours operated = 20,000
• Allowed hours for actual production = 22,000
• Allowed overheads for budgeted hours = \$60,000

### Solution

Recovered overhead = Standard rate per hour x Standard hours for actual output
= 2 x 22,000 = \$44,000
Standard overhead = Standard rate per hour x Actual hours
= 2 x 20,000 = \$40,000
= 44,000 – 62,000 = 18,000 (unfavorable)

The total overhead cost variance can be analyzed into a budgeted or spending variance and a volume variance. Namely:

= 60,000 – 62,000 = 2,000 (Unfavorable)

= 44,000 – 60,000 = 16,000 (Unfavorable)

### What is a spending variance ?

Budget or spending variance is the difference between the budget and the actual cost for the actual hours of operation. This variance can be compared to the price and quantity variance developed for direct materials and direct labor.

### What does a spending variance measure?

Budget or spending variance measures the following: - the differences between the standard prices and the actual prices of manufacturing overhead materials and services - the difference between the standard and actual quantities used

### What are the formulas to calculate the overhead variances?

The formulas that are useful for calculating different overhead variances are as follows: standard rate per unit = budgeted overheads / budgeted output standard rate per hour = budgeted overheads / budgeted hours standard hours for actual output = (budgeted output / budgeted hours) x actual output standard output for actual time = (budgeted output / budgeted hours) x actual output recovered or absorbed overheads = standard rate x actual output budgeted overheads = standard rate per unit x budgeted output