How to calculation of Overhead Spending Variance?

The difference between actual variable manufacturing overhead incurred during the period and actual hours worked during the period on standard variable overhead rate is known as overhead spending variance.

From the calculation of overhead spending variance formula, you will get either favorable or unfavorable result.

Like if your company’s actual manufacturing overhead is higher than the actual hours worked at standard price, you will get a favorable variance. Which means that the company’s has achieved their targets sets for the period.

And if the company actual manufacturing overhead are less than actual hours worked on standard rate, the variance you will get would be an unfavorable one.

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 actual manufacturing overhead of the company are 80,000, the standard manufacturing rate set by company is 12 dollar per hour. And the actual hours worked during December are 7000 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)

See also  Importance and limitation of Direct Labor Rate Variance

Putting the values in 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, you will find that the actual overhead rate is less than the standard rate which $12.

Example#2

ABC Company estimates that their variable overhead will be $20 per hour. In January the actual overhead rate 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 company’s management. As it shows that the company has achieved what was planned at the start of period. The following are the reasons of creating variable manufacturing overhead:

  • The change in demand and supply of indirect material, which were not expected by the management at time of making budget.
  • Due to efficient approach by purchase department, company receives more purchase discount than normal.
  • Due to technological change inside the company, which results in lower the cost of fuel and power sources. For example, company installed a new plant which is more fuel efficient than the previous one.

Causes of Unfavorable Variance

Following are the reasons which results in unfavorable variable manufacturing overhead variance.

  • Due to demand of labor in the market, results in increase in per hour rate of labor. There may be shift of human resource from one area to another region.
  • The use of outdated and inefficient machinery also results in high manufacturing cost.
  • Used of unskilled indirect labor also increase the manufacturing overhead in total.
See also  Importance and Limitation of Sales Price Variance

There may be some changes in the overhead supplies due to change in government rules and regulation.

Scroll to Top