For product-costing purposes, another name for the total overhead variance is total ______.

What Is Variable Overhead Spending Variance?

A spending variance is the difference between the actual amount of a particular expense and the expected (or budgeted) amount of an expense. To understand what variable overhead spending variance is, it helps to know what a variable overhead is. Variable overhead is a cost associated with running a business that fluctuates with operational activity. As production output increases or decreases, variable overheads move in tandem. Overheads are typically a fixed cost, for example, administrative expenses. Variable overheads, on the other hand, are tied to production levels.

Variable overhead spending variance is the difference between actual variable overhead cost, which is based on the costs of indirect materials involved in manufacturing, and the budgeted costs called the standard variable overhead costs.

Key Takeaways

• Variable Overhead Spending Variance is the difference between what the variable production overheads actually cost and what they should have cost given the level of activity during a period.
• The standard variable overhead rate is typically expressed in terms of machine hours or labor hours.
• Variable overhead spending variance is favorable if the actual costs of indirect materials are lower than the standard or budgeted variable overheads.
• Variable overhead spending variance is unfavorable if the actual costs are higher than the budgeted costs.

Understanding Variable Overhead Spending Variance

Variable Overhead Spending Variance is essentially the difference between what the variable production overheads actually cost and what they should have cost given the level of activity during a period.

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 (budgeted) rate if the use both manual and automated processes in their operations.

Variable overhead spending variance is favorable if the actual costs of indirect materials — for example, paint and consumables such as oil and grease—are lower than the standard or budgeted variable overheads. It is unfavorable if the actual costs are higher than the budgeted costs.

Variable production overheads include costs that cannot be directly attributed to a specific unit of output. Costs such as direct material and direct labor, on the other hand, vary directly with each unit of output.

Example of Variable Overhead Spending Variance

Let's say that actual labor hours used are 140, the standard or budgeted variable overhead rate is $8.40 per direct labor hour and the actual variable overhead rate is $7.30 per direct labor hour. The variable overhead spending variance is calculated as below:

Standard variable overhead Rate $8.40 − Actual Variable Overhead Rate $7.30 =$1.10

Difference Per Hour = $ 1.10 × Actual Labor Hours 140 = $154

Variable Overhead Spending Variance = $154

In this case, the variance is favorable because the actual costs are lower than the standard costs.

A favorable variance may occur due to economies of scale, bulk discounts for materials, cheaper supplies, efficient cost controls, or errors in budgetary planning.

An unfavorable variance may occur if the cost of indirect labor increases, cost controls are ineffective, or there are errors in budgetary planning.

Limitations

Fast Fact

Variable overhead spending variance is essentially the difference between the actual cost of variable production overheads versus what they should have cost given the output during a period.

True or false: The underlying model for cost control and product costing purposes is the same for all factory overhead.

True false question.

True Reason: This is true for variable factory overhead only.

False

In a standard cost system, fixed overhead costs for the period are ______ purposes.

Multiple select question.

"unitized" for product-costing

treated as a lump-sum amount for product-costing Reason: This is a characterization of how standard fixed overhead costs are treated for cost-control purposes.

"unitized" for cost-control Reason: For product-costing purposes, standard fixed overhead costs are "unitized." For cost-control purposes, standard fixed overhead costs are treated as a "lump-sum" amount.

treated as a lump sum amount for cost-control

For product-costing purposes, the total overhead cost variance for a period is equal to the difference between total actual overhead cost incurred and ______.

Multiple select question.

the product of the standard overhead rate and the standard allowed units of the cost-allocation base

Reason: .

total budgeted overhead cost in the master budget for the period

standard overhead cost applied to production

total budgeted overhead cost in the flexible budget for the period

Cakes by Jacki applies standard overhead cost to cakes based on direct labor hours (DLHs). Last quarter the budget called for 3,000 cakes and a total of 9,000 DLHs (3 hours per cake). The standard overhead application rate was $25 per DLH the quarter 3,200 cakes were produced. Total actual overhead was $232,000 and 9,500 DLHs were actually used. Cakes by Jacki uses a standard cost system. Calculate the over or under applied overhead (i., the total overhead cost variance) for the quarter.

Multiple choice question.

$10,250 underapplied Reason: Total overhead cost variance = Total actual overhead cost incurred - total applied overhead cost = $232,000 - ([3,200 units × 3 DLHs/unit] × $25/DLH) = $232,000 - $244,800 = $12,800 overapplied

$12,800 overapplied Reason: Total overhead cost variance = Total actual overhead cost incurred - total applied overhead cost = $232,000 - ([3,200 units × 3 DLHs/unit] × $25/DLH) = $232,000 - $244,800 = $12,800 overapplied

$10,250 overapplied Reason: Total overhead cost variance = Total actual overhead cost incurred - total applied overhead cost = $232,000 - ([3,200 units × 3 DLHs/unit] ×$25/DLH) = $232,000 - $244,800 = $12,800 overapplied

$2,500 underapplied Reason:

Multiple choice question.

variable overhead rate variance and a variable overhead spending

variable overhead spending variance and a variable overhead production volume Reason: The production volume variance is associated with fixed, not variable, overhead.

production volume variance and an efficiency Reason: The production volume variance is associated with fixed, not variable, overhead cost.

variable overhead spending variance and a variable overhead efficiency

Fixed factory overhead costs ______.

Multiple choice question.

must be unitized for product costing purposes

should never be unitized

must be unitized for cost control purposes

should be unitized for all purposes

Assume direct labor hours (DLHs) is used as the basis for assigning standard overhead cost to outputs (products). In this case, the variable overhead spending variance in any given period is equal to the difference between the ______.

Multiple choice question.

actual variable overhead cost incurred and budgeted variable overhead cost based on the actual DLHs worked during the period

actual variable overhead cost and budgeted variable overhead based on standard DLHs allowed for the period's output

budgeted variable overhead based on inputs (i., DLHs worked) and standard variable overhead applied to production Reason: This amount is used to calculate the variable overhead efficiency variance.

actual variable overhead cost incurred and the standard variable overhead cost applied to production. Reason: This is the definition of the total variable overhead cost variance, not the variable overhead spending variance.

For product-costing purposes, another name for the total overhead variance is total ______.

Multiple choice question.

operating-income variance

master budget variance

static budget variance

under/overapplied overhead

Given the following, calculate total over or underapplied overhead (i., the total overhead cost variance for the period) assuming the company uses a standard cost system.

Budgeted production: 10,000 units with each unit requiring 2 machine hours Standard overhead application rate: $17 per machine hour

Actual production: 9,500 units Actual machine hours used: 24, Actual overhead cost: $410,

Multiple choice question.

$6,500 underapplied

there is a direct labor rate (price) variance for the period in question Reason: There is no necessary relationship between these two variances. However, there is a relationship between the direct labor efficiency variance and the variable overhead efficiency variance (assuming that DLHs are used as the basis for applying variable overhead cost to outputs).

In traditional cost systems that rely on the use of a single activity variable for allocating variable overhead costs to outputs, cost variances for variable overhead must be interpreted carefully primarily because of ______.

Multiple choice question.

the imperfect relationship between variable overhead costs and the chosen activity variable used to allocate costs Reason: That is, it is virtually impossible that a single activity variable (e., DLHs) can adequately explain changes in total variable overhead cost. A richer array of "cost drivers" would be needed to do this.

complications associated with collecting and summarizing actual cost data for the period

difficulties associated with measuring the activity variable for the period

Given the following, calculate the total fixed overhead variance.

Budgeted production: 10,000 units with each unit requiring 2 machine hours Overhead application rate: $17 per machine hour ($12 variable and $5 fixed)

Actual production: 9,500 units Actual machine hours used: 24, Actual overhead cost: $410,000 ($263,375 variable and $146,625 fixed)

Multiple choice question.

$27,875 U

Reason:

Fixed overhead applied: 9,500 units × 2 hours × $5 = $118,750 - $146, actual = $27,875 U

$21,625 F

Reason: Fixed overhead applied: 9,500 units × 2 hours × $5 = $118,750 - $146, actual = $27,875 U

$21,625 U

Reason: Fixed overhead applied: 9,500 units × 2 hours × $5 = $118,750 - $146, actual = $27,875 U

$27,875 F

Reason: Fixed overhead applied: 9,500 units × 2 hours × $5 = $118,750 - $146, actual = $27,875 U

The variable overhead spending variance ______.

Multiple choice question.

cannot be further broken down (decomposed) for cost-control purposes Reason: A variable overhead spending variance considered "material" would likely demand a follow-up analysis to determine why spending on total variable overhead differed from budgetary expectations.

is caused by actual spending on variable overhead per unit of the activity variable differing from the budgeted (standard) cost Reason: In formula form: variable overhead variance = AQ ×(AP - SP), where AQ = actual units of the activity variable, AP = actual variable overhead cost per unit of the activity variable, and SP = standard variable overhead rate per unit of the activity variable.

is favorable if the actual variable overhead rate (AP) exceeds the standard variable overhead rate (SP). Reason: The opposite is the case!

Reason: Responsibility for the variable overhead efficiency variance rests with whoever is responsible for controlling the activity variable used for cost- assignment purposes.

is the responsibility of whoever is responsible for controlling the activity variable used to assign variable overhead cost to outputs

is related to the direct labor efficiency variance if direct labor hours (DLHs) are used to apply variable overhead cost to outputs.

reflects efficiency or inefficiency in the use of the activity variable used to apply variable overhead costs to outputs

Assume a situation where direct labor hours (DLHs) is used as the basis for assigning standard variable overhead cost to outputs (products). In this case, the variable overhead efficiency variance in any given period is equal to the difference between ______.

Multiple select question.

actual variable overhead cost and the flexible budget for variable overhead based on actual DLHs worked Reason: This is the formula for calculating the variable overhead spending variance, not the variable overhead efficiency variance.

the total variable overhead variance for the period and the variable overhead spending variance Reason: The total variable overhead cost variance for any period = variable overhead spending variance + variable overhead efficiency variance.

budgeted variable overhead based on inputs and budgeted variable overhead based on outputs

budgeted variable overhead based on actual DLHs worked and standard variable overhead applied to production Reason: Standard variable overhead applied to production = flexible budget for variable overhead based on outputs. Thus, this formulation of the variable overhead efficiency variance is correct.

Capacity-related manufacturing support costs is another name for fixed Blank

1 Blank 1 fixed , Correct Unavailable manufacturing overhead

The general term used to describe the level of output (activity) used to establish the

standard fixed overhead application rate is denominator Blank 1Blank 1

denominator , Correct Unavailable activity level or volume

The production volume variance for a given period equals the difference between ______.

Multiple choice question.

budgeted fixed overhead (in total) and the amount of fixed overhead cost applied to production Reason: As such, this variance could also be called over/under applied fixed overhead cost.

the actual fixed overhead cost incurred and the fixed overhead cost applied to production Reason: This is the definition of the total fixed overhead cost variance, a component of which is the production volume variance.

the actual fixed overhead cost incurred and budgeted fixed overhead for the period Reason: This is the definition of the fixed overhead spending (or budget) variance, not the production volume variance.

If budgeted output is used to determine the fixed overhead application rate, the cost of unused capacity is ______.

Multiple choice question.

provided as part of end-of-period variance calculations

hidden in the cost of units actually produced

What is the total overhead variance?

What are the two variances for variable overhead?

Which of the following is the reason for overhead variance in cost accounting?

Why is fixed overhead in the master budget the same as fixed overhead in the flexible budget?