The difference between actual variable manufacturing overhead incurred during the period and actual hours worked during the period on the standard variable overhead rate is known as overhead spending variance.
You will get favorable or unfavorable results from the calculation of the overhead spending variance formula.
If your company’s manufacturing overhead is higher than the actual hours worked at the standard price, you will get a favorable variance.
This means that the company has achieved its targets sets for the period.
And if the company’s actual manufacturing overhead is less than actual hours worked at the standard rate, the variance you will get would be unfavorable.
Calculation of Overhead spending variance:
The formula for overhead spending variance is as under
Variable Overhead Spending Variance = (Actual Hour × Actual Variable Overhead Rate) – (Actual Hours Worked × Standard Variable Overhead Rate)
so,
Variable Overhead Spending Variance = Actual Hours Worked (Actual Variable Overhead Rate – Standard Variable Overhead Rate)
For more detailed learning please read the example given below
Example:
The DJ Company has compiled the following data for the month of December 2018
Calculation shows that the actual manufacturing overhead of the company is 80,000, and the standard manufacturing rate set by the company is 12 dollars per hour.
And the actual hours worked during December are 7,000 hours.
Required: Calculate the variable overhead spending variance using the above information for the month of December.
Solution:
The given formula for variable manufacturing overhead is
Variable overhead spending variance = Actual hours worked (Actual variable overhead rate – Standard variable overhead rate)
Putting the values in the formula
= 7000 × (11.5 (W-1) – 12
=7000 × -0.5
= 35, 00 fav
W-1
Actual overhead rate = Actual manufacturing / Actual hours worked
= 80,000/(7000)
= $11.4
Analysis:
Now analyze the calculation, and you will find that the actual overhead rate is less than the standard rate which is $12.
Example#2
ABC Company estimates that its variable overhead will be $20 per hour. In January the actual overhead rate was identified as $23 per hour.
The actual labor hours worked are 20,000.
Required: Calculate the variable spending overhead variance
Solution:
Variable overhead spending variance = Actual hours worked (Actual variable overhead rate – Standard variable overhead rate)
=20,000 × ($23 – $20)
=20,000 × 3
Variable overhead spending variance = $60,000
Causes of Variable overhead spending variance
A favorable variance is always a good sign for the company’s management as it shows that the company has achieved what was planned at the start of the period.
The following are the reasons for creating variable manufacturing overhead:
- The management did not expect a change in demand and supply of indirect materials at the time of making a budget.
- Due to the efficient approach by the purchasing department, the company receives more purchase discounts than normal.
- Due to technological change inside the company, which results in a lower cost of fuel and power sources. For example, the company installed a new, more fuel-efficient plant than the previous one.
Causes of Unfavorable Variance
Following are the reasons which result in unfavorable variable manufacturing overhead variance.
- The demand for labor in the market results in an increase in per hour labor rate. There may be a shift of human resources from one area to another region.
- The use of outdated and inefficient machinery also results in high manufacturing costs.
- Used of unskilled indirect labor also increase the manufacturing overhead in total.
There may be some changes in the overhead supplies due to changes in government rules and regulations.