Page 133 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes 7.2.3 Overhead Variances

The following figure explains the classification of overhead variance:
Figure 7.4: Classification of Overhead Variance

Overhead Variance

Variable Overhead Variance Fixed Overhead Variance

Variable Overhead Variable Overhead
Expenditure Variance Efficiency Variance

Calendar Variance Capacity Variance Efficiency Variance

In general, the overhead variance is defined is as the variance in between standard cost of

overhead estimated for the actual output and actual cost of overhead really incurred.
With reference to absorption overheads, the variance occurs only during either over or under
absorption of overheads.
Under absorption of overheads means that the standard cost of the overhead is more than that of

the incurred actual overhead. In brief, it is a favourable situation as far as the firm concerned and
vice versa in the case of over absorption of overheads.
1. Variable overhead cost variance: It is the variance or deviation in between the standard
variable overhead for actual production of units and Actual overhead incurred

= Standard variable overhead rate per unit × Actual output – Actual variable
overheads incurred
2. Variable overhead expenditure variance: This is the variance in between the two different
rates of variable overheads viz. standard rate and actual rate; denominated in terms of
Actual hours taken consumed by the fi rm.

= Actual Hours (Standard Rate – Actual Rate)
3. Variable overhead effi ciency variance: It is another variance which is in between the
standard hours for actual output and actual hours consumed during the production;
denominated in terms of standard rate.
= Standard Rate (Standard Hours for Actual Output – Actual Hours)
4. Fixed overhead cost variance: The most important variance is overhead cost variance
= Standard Overhead Cost for Actual Output – Actual Overheads

The second important variance is Budgeted or Expenditure variance
= Budgeted Overheads – Actual Overheads

What is the difference in between the budgeted figures and standards?

Budgeted figures are not adjusted to the actual but the standards could be adjusted or
tuned towards the actual.
The next important variance is overhead volume variance:
(a) If the standard overhead rate per unit is given
= Standard Rate per Unit (Actual Production – Budgeted Production)

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