Variable Manufacturing Overhead Spending Variance
Variable Overhead Spending Variance is the difference between variable production overhead expense incurred during a period and the standard variable overhead expenditure. The variance is also referred to as variable overhead rate variance and variable overhead expenditure variance.
Variable Overhead Spending Variance:
= Actual Manufacturing Variable Overheads Expenditure
Actual hours x Standard Variable Overhead Rate per hour
- Actual Hours is the number of machine hours or labor hours during a period.
Variable Overhead Spending Variance is essentially the difference between what the variable production overheads did cost and what they should have cost given the level of activity during a period.
Standard variable overhead rate may be expressed in terms of the number of machine hours or labor hours. So for example, in case of a labor intensive manufacturing business, standard variable overhead rate may be expressed in terms of the number of labor hours whereas in case of predominantly automated production processes, a standard rate based on the number of machine hours may be more appropriate. Very often however, companies have a combination of manual and automated business processes which may necessitate the use of both basis of variable overhead absorption.
AAA Sports LTD is a small manufacturing company specializing in the production of cricket bats. AAA Sports LTD currently manufactures 2 types of bats:
AAA Plus - a hand-crafted English Willow bat designed for professional use
AAA Gold - a machine-manufactured cheaper bat designed for casual cricket
Following is a break-up of standard variable manufacturing overhead cost:
|AAA Plus||AAA Gold|
|Number of Hours||2 direct labor hours||1 machine hour|
($10 per direct labor hour)
($12 per machine hour)
Following information relates to the actual data from last month:
|Variable Manufacturing Overheads||$175,000|
|Direct Labor Hours||10,000|
Variable Overhead Spending Variance shall be calculated as follows:
|Actual Variable Overhead Expense||175,000|
|Standard Variable O.H. Rate||x $10||x $12|
|Standard Overhead Expense||100,000||60,000||(160,000)|
|Variable Overhead Expenditure Variance||15,000||Adverse|
Favorable variable manufacturing overhead spending variance indicates that the company incurred a lower expense than the standard cost.
Possible reasons for favorable variance include:
- Economies of scale (e.g. increase in order size of indirect material leading to bulk discounts on purchase)
- A decrease in the general price level of indirect supplies
- More efficient cost control (e.g. optimizing electricity consumption through the installation of energy efficient equipment)
- Planning error (e.g. failing to take into account the learning curve effect which could have reasonably be expected to result in a more efficient use of indirect materials in the upcoming period)
An adverse variable manufacturing overhead spending variance suggests that the company incurred a higher cost than the standard expense.
Potential causes for an adverse variance include:
- A rise in the national minimum wage rate leading to a higher cost of indirect labor
- A decrease in the level of activity not fully offset by a decrease in overheads (e.g. electricity consumption of machines during set up is usually same even if a smaller batch of output is required to be produced)
- In efficient cost control (e.g. not optimizing the batch production quantities leading to higher set up costs)
- Planning error (e.g. failing to take into account the increase in unit rates of electricity applicable for the level of activity budgeted during a period)
Variable production overheads by their nature include costs that cannot be directly attributed to a specific unit of output unlike direct material and direct labor which vary directly with output. Variable overheads do however vary with a change in another variable. Traditional management accounting often define blanket variables such as machine hours or labor hours which seldom provides a meaningful basis of cost control. The use of activity based costing to calculate overhead variances can significantly enhance the usefulness of such variances.