Page 235 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes
Figure 12.7: Overhead Variances
Overhead Cost Variance

Variable Overhead Variance Fixed Overhead Variance

Variable Overhead Variable Overhead Fixed Overhead Fixed Overhead
Expenditure Efficiency Variance Expenditure Variance Volume Variance
Variance

Fixed Overhead Fixed Overhead Fixed Overhead
Efficiency Variance Capacity Variance Calendar
Variance

The variable overhead variance may be classified into the following types for the purpose
of planning and control:

(a) Variable Overhead Expenditure Variance, and
(b) Variable Overhead Efficiency Variance.
(a) Variable Overhead Expenditure Variance: Variable overhead expenditure variance is
the difference between the standard variable overhead rate and the actual variable
overhead rate duly multiplied by actual hours. It highlights the cost incidence of the
difference between the expenditure allowed and the actual expenditure incurred.
Variable overhead expenditure variance represents efficiency in the use of services
or excess costs. An unfavourable variance indicates excessive use of services or
increase in the cost of services. On the other hand, a favourable variance denotes use
of services in an economical manner or savings in costs incurred. It is calculated as
under:
Variable Overhead Expenditure Variance = (Standard variable overhead rate per
hour × Actual hours worked) – (Actual variable overheads)
OR VOEV = (Recovered variable overheads) – (Actual variable overheads)
(b) Variable Overhead Efficiency Variance: The variable overhead efficiency variance is
calculated by taking the difference in standard output and actual output multiplied
by the standard variable overhead rate. The variable overhead efficiency variance is
calculated as under:
Variable Overhead Efficiency Variance = (Standard variable overhead rate ×
Standard quantity) – (Actual quantity)

OR Variable Overhead Efficiency Variance = (Standard time for actual production ×
Standard variable overhead rate per hour) – (Actual hours worked ×
Standard variable overhead rate per hour)
OR Variable Overhead Efficiency Variance = Standard rate × (Standard quantity –
Actual quantity)
2. Fixed Overhead Variance: Fixed overhead variance is that portion of total overhead cost
variance which is due to the difference between the standard costs of fixed overhead
allowed for the actual output achieved and the actual fixed overhead cost incurred.

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