What Is Variable Overhead Spending Variance?
Let me explain what a spending variance is—it's simply the difference between the actual amount you spend on a particular expense and what you budgeted for it. To get variable overhead spending variance, you first need to grasp variable overhead itself. Variable overhead refers to costs in your business that change with operational activity; as your production goes up or down, these costs follow suit. Regular overheads are usually fixed, like admin expenses, but variable ones are linked directly to how much you're producing.
So, variable overhead spending variance is the gap between your actual variable overhead costs—think indirect materials used in manufacturing—and the standard budgeted costs for those.
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
At its core, variable overhead spending variance is the difference between what your variable production overheads actually cost and what they should have cost based on the activity level in that period.
You typically express the standard variable overhead rate in terms of machine hours or labor hours, depending on if your production is more manual or automated. If your operations mix both, you might use a combination of machine and labor hours for the budgeted rate.
This variance is favorable when the actual costs of indirect materials—like paint, oil, or grease—are lower than your budgeted variable overheads. It's unfavorable if those actual costs come in higher than budgeted.
Important
Remember, variable production overheads cover costs that you can't directly tie to a specific unit of output. In contrast, things like direct materials and direct labor vary directly with each unit you produce.
Example of Variable Overhead Spending Variance
Suppose your actual labor hours used are 140, the standard variable overhead rate is $8.40 per direct labor hour, and the actual variable overhead rate is $7.30 per direct labor hour. You calculate the variable overhead spending variance like this: Standard rate $8.40 minus actual rate $7.30 equals $1.10 difference per hour. Then, multiply $1.10 by the actual labor hours of 140, which gives $154. So, the variable overhead spending variance is $154.
In this scenario, the variance is favorable because actual costs are lower than standard costs. This could happen due to economies of scale, bulk discounts on materials, cheaper supplies, efficient cost controls, or even errors in your budgetary planning.
On the flip side, an unfavorable variance might stem from rising indirect labor costs, ineffective cost controls, or planning mistakes.
Limitations
Keep in mind, variable overhead spending variance is essentially the difference between the actual cost of variable production overheads and what they should have cost given the output during a period.
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