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# How To Compute Overhead Variances

September 14, 2023
Bill Kimball

In this case, you want to investigate why your actual costs are more than your standard costs. The hourly rate in this formula includes such indirect labor costs as shop foreman and security.

Variable Overhead Spending Variance is essentially the difference between what the variable production overheadsactuallycost and what theyshouldhave cost given the level of activity during a period. Variable Overhead Spending Variance is the difference between what the variable production overheadsactuallycost and what theyshouldhave cost given the level of activity during a period. This variance is unfavorable for Jerry’s Ice Cream because actual costs of \$100,000 are higher than expected costs of \$94,500. This could be for many reasons, and the production supervisor would need to determine where the variable cost difference is occurring to better understand the variable overhead efficiency reduction. Variance formulas can highlight differences between what’s expected and what actually happens. This lesson analyzes price variance, efficiency variance, and variable overhead variance and explains what they can reveal about business performance. In such a case we do not get concerned about the rate of absorption unless specifically needed in some calculation.

## Compute The Total Overhead Variance

Divide the \$10,000 fixed costs by 5,000 units to get the actual \$2 fixed factory overhead cost per unit. Your standard factory overhead costs are budgeted factory overhead amounts. The standard factory overhead costs remain fixed over the long term and serve as a benchmark for measuring your actual overhead cost variances. You calculate your standard per unit cost using your budgeted figures. For example, your budgeted fixed costs are \$12,000, budgeted variable costs are \$4,000, and the budgeted production is 4,000 units.

## Absorption Based On Input Time

Standard periods for actual output and the overhead absorption rate per unit period are required for such a calculation. The computation and analysis of variable factory overhead is pretty much similar to that of direct labor.

Standard output for actual input and the overhead absorption rate per unit output are required for such a calculation. The absorbed overhead may be ascertained using the data relating to input. Standard input for actual output and the overhead absorption rate per unit input are required for such a calculation.

A favorable variance means that the actual variable overhead expenses incurred per labor hour were less than expected. The budgeted fixed factory overhead is also given in total amount – for a given level of production. The total standard FFOH is computed as shown earlier, and is also known as “applied fixed factory overhead”. The factory worked for 26 days putting in 860 hours work every day and achieved an output of 2,050 units.

Note that there is no alternative calculation for the variable overhead spending variance because variable overhead costs are not purchased per direct labor hour. The variable overhead efficiency variance calculation presented previously shows that 18,900 in actual hours worked is lower than the 21,000 budgeted hours.

## Accounting For Managers

If actual overhead costs amount to \$11,000, the fixed overhead budget variance is \$1000, meaning the company is \$1000 over budget in overhead costs that month. If, for example, 1,000 units were produced that month, and \$10 of overhead cost is assigned to each unit, the calculation is done against the per-unit costs of \$9 and \$11, respectively. Either way, this overhead variance formula compares overhead costs from budget to actual, and it highlights to management if overhead costs are changing against expectations. Companies use an overhead variance formula because they are required to assign a portion of the fixed overhead costs to each product.

You track the factory overhead costs as your inventory moves through the production line. The factory overhead cost variance report compares the actual fixed and variable costs against the standard fixed and variable costs.

The standard variable overhead rate is typically expressed in terms of the number of machine hours or labor hours depending on whether the production process is predominantly carried out manually or by automation. A company may even use both machine and labor hours as a basis for the standard rate if the use both manual and automated processes in their operations. That gives estimated revenues and costs at varying levels of production.

This variance is positive if the actual amount produced is greater than the budgeted amount and is negative if production is below budgeted levels. Sometimes these flexible budget figures and overhead rates differ from the actual results, which produces a variance. The absorbed overhead may be ascertained using the data relating to input .

If Connie’s Candy only produced at 90% capacity, for example, they should expect total overhead to be \$9,600 and a standard overhead rate of \$5.33 . If Connie’s Candy produced 2,200 units, they should expect total overhead to be \$10,400 and a standard overhead rate of \$4.73 . In addition to the total standard overhead rate, Connie’s Candy will want to know the variable overhead rates at each activity level.

• Note that there is no alternative calculation for the variable overhead spending variance because variable overhead costs are not purchased per direct labor hour.
• Often, explanation of this variance will need clarification from the production supervisor.
• A budget variance measures the difference between budgeted and actual figures for a particular accounting category, and may indicate a shortfall.
• Anderson is CPA, doctor of accounting, and an accounting and finance professor who has been working in the accounting and finance industries for more than 20 years.
• The total standard FFOH is computed as shown earlier, and is also known as “applied fixed factory overhead”.

A favorable variance means that the actual hours worked were less than the budgeted hours, resulting in the application of the standard overhead rate across fewer hours, resulting in less expense being incurred. However, a favorable variance does not necessarily mean that a company has incurred less actual overhead, it simply means that there was an improvement in the allocation base that was used to apply overhead. The standard variable overhead rate is typically expressed in terms of machine hours or labor hours. †\$273,000 standard variable overhead costs match the flexible budget presented in Note 10.18 “Review Problem 10.2”, part 2. †\$105,000 standard variable overhead costs matches the flexible budget presented in Figure 10.2 “Flexible Budget for Variable Production Costs at Jerry’s Ice Cream”.

Other variances companies consider are fixed factory overhead variances. Factory overhead expenses are divided into fixed and variable costs. Factory overhead costs are also known as manufacturing overhead costs and indirect production costs. Fixed factory overhead expenses are long-term costs that do not change no matter how many units are produced. Typical fixed factory overhead costs include rent, depreciation and property taxes.

Variable factory overhead costs can change with each production run. Variable factory overhead costs include indirect labor, utilities, supplies and parts. Controlling your manufacturing expenses starts with identifying your factory overhead costs. These are all the expenses other than the direct materials and direct labor used to produce your merchandise.

## Variable Overhead Spending Variance Calculation

Your standard fixed factory overhead cost is the \$12,000 budgeted cost divided by 4,000 projected units, or \$3 per unit. The standard variable factory overhead cost is the \$4,000 budgeted cost divided by 4,000 projected units, or \$1 per unit. Standard costs are used to establish the flexible budget for variable manufacturing overhead.

He currently researches and teaches at the Hebrew University in Jerusalem. Understand these critical pieces of notation by exploring the definitions and purposes of debits and credits and how they help form the basics of double-entry accounting. Building the working table with all the values needed and then using the formula based on values would be the simplest method to arrive at the value of the variance. Finding the costs by building up the working table and using the formula involving costs is the simplest way to find the TOHCV.

## How Is Absorption Costing Treated Under Gaap?

Factory overhead costs are better analyzed when they are segregated into variable and fixed. Variable overhead efficiency variance refers to the difference between the true time it takes to manufacture a product and the time budgeted for it, as well as the impact of that difference. An unfavorable variance may occur if the cost of indirect labor increases, cost controls are ineffective, or there are errors in budgetary planning. This could be for many reasons, and the production supervisor would need to determine where the variable cost difference is occurring to better understand the variable overhead reduction. The amount of expense related to fixed overhead should be relatively fixed, and so the fixed overhead spending variance should not theoretically vary much from the budget. The absorbed overhead may be ascertained using the data relating to output. Standard output for actual periods and the overhead absorption rate per unit output are required for such a calculation.