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 hoursxStandard 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 PlusAAA Gold
Number of Hours2 direct labor hours1 machine hour
Indirect Labor$10-
Sand paper$1-
Machine lubricants-$0.5
($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 Hours10,000
Machine Hours5,000

Variable Overhead Spending Variance shall be calculated as follows:

Actual Variable Overhead Expense175,000
Actual Hours10,0005,000
Standard Variable O.H. Ratex $10x $12
Standard Overhead Expense100,00060,000(160,000)
Variable Overhead Expenditure Variance15,000


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.