Variable overhead rate variance, a difference between the actual variable overhead rate and the predetermined or standard variable overhead rate, impacts the reported cost of goods manufactured and absorption costing income statement. The calculation of variable overhead rate variance involves analyzing actual variable overhead costs, actual production output, standard variable overhead rate, and budgeted variable overhead. Understanding the relationship between these entities is crucial for accurate variance analysis and operational efficiency.
**Variable Overhead Rate Variance Structure**
The structure of a variable overhead rate variance is a key component in understanding and analyzing overhead costs. Here’s how it works:
Definition:
Variable overhead rate variance is the difference between the actual variable overhead rate used in a period and the standard variable overhead rate that should have been used.
Causes:
- Actual variable overhead costs not matching budgeted variable overhead costs: This can be due to changes in production output, material costs, or labor rates.
- Actual production output not matching standard production output: This can be caused by inefficiencies, scrap, or downtime.
Calculation:
The variable overhead variance is calculated using the following formula:
Actual Overhead Cost - (Standard Overhead Rate x Actual Production Output)
Interpretation:
A favorable variance (actual cost is less than standard cost) typically indicates efficient production or lower-than-expected overhead costs. It may also result from overproduction.
An unfavorable variance (actual cost is greater than standard cost) usually signals inefficiencies or higher-than-anticipated overhead expenses. It might also point to underproduction.
Presentation:
For reporting purposes, the variable overhead rate variance can be presented in a variance table, as shown below:
| Account | Actual | Standard | Variance |
|---|---|---|---|
| Variable Overhead | $10,000 | $9,500 | $500 F |
Analysis:
To further investigate the variance, you can drill down into the individual components that make up the overhead cost, such as labor, materials, and utilities. Comparing actual and budgeted amounts for each component can pinpoint specific areas of overspending or underspending.
Management Implications:
Understanding the structure and causes of the variable overhead rate variance is crucial for management. It enables them to:
- Identify areas of cost savings or inefficiencies
- Implement corrective actions to improve efficiency
- Optimize overhead budgeting and control
Question 1:
What is the cause of a variable overhead rate variance?
Answer:
A variable overhead rate variance occurs when the actual overhead incurred differs from the budgeted overhead multiplied by the actual activity level.
Question 2:
How is a variable overhead rate variance computed?
Answer:
A variable overhead rate variance is calculated as the difference between the actual overhead incurred and the budgeted overhead at the actual activity level, multiplied by the actual activity level.
Question 3:
What are the two types of variable overhead rate variances and their formulas?
Answer:
The two types of variable overhead rate variances are:
- Spending variance:
- Formula: (Actual overhead rate – Budgeted overhead rate) x Actual activity level
- Efficiency variance:
- Formula: (Budgeted overhead rate – Applied overhead rate) x Actual activity level
Well, there you have it! We’ve covered the basics of variable overhead rate variance. I hope you found this article helpful. If you have any questions, please feel free to reach out to me. And be sure to check back later for more great content on all things accounting!