Variable overhead spending variance measures the difference between budgeted and actual variable overhead costs during a specific period. It is closely related to four key entities: (1) variable overhead costs, which are costs that vary with production or activity levels; (2) budgeted variable overhead rate, which is the expected cost per unit of production or activity; (3) actual variable overhead rate, which is the actual cost incurred per unit of production or activity; and (4) production or activity level, which refers to the number of units produced or activities performed. By understanding the relationship between these entities, companies can analyze and control their variable overhead costs more effectively, leading to improved profitability.
The Variable Overhead Spending Variance: A Blueprint for Clarity
The variable overhead spending variance measures the difference between the budgeted variable overhead rate and the actual variable overhead rate. It helps manufacturers determine if they are spending too much or too little on variable overhead costs.
Components of the Variable Overhead Spending Variance
- Actual overhead costs: These are the actual expenses incurred during production.
- Standard overhead costs: These are the budgeted overhead costs that should have been incurred.
- Actual production level: This is the actual number of units produced during the period.
- Standard production level: This is the budgeted number of units that should have been produced.
Calculating the Variable Overhead Spending Variance
The variable overhead spending variance is calculated as follows:
Actual overhead costs - (Standard overhead rate x Actual production level)
Interpreting the Variable Overhead Spending Variance
A favorable variance indicates that actual variable overhead costs were less than budgeted. This can result from:
- Lower-than-expected production levels
- Lower-than-expected variable overhead rates
- Higher-than-expected efficiency
An unfavorable variance indicates that actual variable overhead costs were greater than budgeted. This can result from:
- Higher-than-expected production levels
- Higher-than-expected variable overhead rates
- Lower-than-expected efficiency
Using the Variable Overhead Spending Variance for Decision-Making
The variable overhead spending variance can help manufacturers identify areas for improvement. For example, a favorable variance may indicate that the company is doing a good job of controlling variable overhead costs. An unfavorable variance may indicate that the company needs to take steps to reduce variable overhead costs.
Formatting the Variable Overhead Spending Variance
The variable overhead spending variance can be presented in a table as follows:
| Component | Actual | Standard | Variance |
|---|---|---|---|
| Actual Overhead Costs | $50,000 | $45,000 | $5,000 F |
| Standard Overhead Rate | $10 | $11 | $1 U |
| Actual Production Level | 5,000 Units | 5,000 Units | 0 |
| Variable Overhead Spending Variance | $6,000 F |
Question 1:
How is variable overhead spending variance calculated?
Answer:
The variable overhead spending variance is calculated by comparing the actual variable overhead incurred to the budgeted variable overhead, multiplied by the actual level of activity.
Question 2:
What is the formula for variable overhead spending variance?
Answer:
Variable overhead spending variance = (Actual variable overhead – Budgeted variable overhead per unit of activity) x Actual level of activity
Question 3:
What are the potential causes of a favorable variable overhead spending variance?
Answer:
Potential causes of a favorable variable overhead spending variance include achieving higher productivity than budgeted, purchasing variable overhead resources at a lower cost than budgeted, and reducing overtime hours.
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