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Standard Costing- Variable Overhead Variances

Variable overhead varies in proportion to the level of output. Therefore, irrespective of the volume of production, the standard variable overhead rate remains the same. Hence, as compared to computation of fixed overhead cost variances; computation of variable overhead variances is quite simple. In fact, computation method of variable overhead variances is similar to material & labour cost variances.

Variable Overhead Cost Variance:

The difference between the standard variable overhead for actual output (i.e. recovered variable overhead) & the actual variable overhead incurred is known as the variable overhead cost variance.

The formula is:
Variable overhead recovered – Actual variable overhead

The variable overhead variance can be bifurcated into variable overhead expenditure variance & variable overhead efficiency variance.

Variable Overhead Expenditure Variance:

The difference between the amount of variable overhead that has been actually incurred & the variable overhead which should have been incurred for the actual hours that has been worked is known as the variable overhead expenditure variance.
The formula is:
Actual variable overhead – Standard variable overhead

Where, Standard Overhead = Actual hours * Standard rate per hour
Or, Standard output of actual hours * Standard rate per unit.

Variable Overhead Efficiency Variance:

The difference between the amounts of variable overhead that has been recovered & the amount which would have been recovered had been the actual hours worked at standard efficiency.

The formula is:

Standard variable overhead rate per hour * (Actual hours – Standard hours of actual production)
Or, Standard rate per unit * (Standard output - Actual output)
Or, Variable overhead recovered – Standard variable overhead.

Relationship between the variances:

Variable overhead cost variance = Expenditure variance + Efficiency variance

Illustration 1:

For a particular production department, the standard variable overhead has been budgeted as below:

Budgeted Variable overhead for the period: $ 40000
Budgeted Volume of Production for the period: 80000 units
The actual variable overheads incurred during the period which is under review amounted to $ 56000, whereas the actual production were 96000 units.

Calculate the variable overhead variance.

Solution:

Standard Variable Overhead rate per unit:

= Budgeted Overhead = $ 40000 = $ 0.50 per unit.
Budgeted Production 80000

Variable Overhead Recovered (i.e. charged to production):

= Actual Production * Standard rate per unit

= 96000 * $ 0.50 = $ 48000

Actual Variable Overhead = $ 56000

Variable Overhead Variance:

Overhead Recovered – Actual Overhead

= $ 48000 - $ 56000 = $ 8000 Adverse.

Illustration 2:

Calculate Variable overhead cost variance, dividing the same into expenditure variance & efficiency variance from the following particulars:

Standard time per unit                                                 4 hours
Budgeted output                                                         1000 units
Budgeted variable overhead                                       $ 3000
Actual output                                                              900 units
Actual hours worked                                                  1700 hours
Actual variable overhead                                            $ 2680

Solution:

Calculation on the basis of Standard hours:

Budgeted hours = Budgeted Output * Standard time per unit

= 1000 * 4 hours = 4000 hours

Standard Variable Overhead Rate per hour = Budgeted Overhead
Budgeted hours

= $ 6000 = $ 0.75
4000

Standard hours of Actual production = 900 units * 4 hours = 3600 hours

Variable overhead recovered by Actual production:

= Standard rate per hour * Standard hours of Actual production

= $ 0.75 * 3600 = $ 2700

Variable Overhead Cost Variance = Overhead recovered – Actual Overhead $

= $ 2700 - $ 2680 20 F

Variable Overhead Expenditure Variance = Actual Overhead – (Actual hours *
Standard Rate per hour)

= $ 2680 – (1700 * 0.75) 1405A

Variable Overhead Efficiency Variance = Standard Rate per hour * (Actual
Hours – Standard hours of actual production)

= 0.75 * (1700 – 3600) 1425 F

Check = Variable Overhead Cost Variance = Expenditure + Efficiency 20F

Calculation on the basis of Units of Output:

Standard Variable Overhead Rate per unit = Budgeted Overhead
Budgeted output

= $ 3000 = $ 3 per unit
1000

Variable Overhead recovered by Actual output = Actual Output *
Standard rate per unit

= 900 units * 3= $ 2700

Standard Output in Actual hours = Actual hours________
Standard time per unit

= 1700 = 425 units
4

Variable Overhead Cost Variance: Overhead recovered – Actual overhead

= $ 2700 - $ 2680 20 F

Variable Overhead expenditure variance: Actual Overhead – (Standard output *
Standard Rate per unit)

= $ 2680 – (425 * 3) 1405 A

Variable Overhead efficiency variance = Standard rate per unit *
(Standard Output – Actual Output)

= $ 3 * (425 – 900) 1425 F

Check: Variable Overhead cost variance = Expenditure + Efficiency 20 F

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