## 'Variable Overhead Spending Variance' Definition:

In variance analysis, the total variable overhead variance may be split into: **spending variance** and **efficiency variance**. The *variable overhead spending variance* refers to the variance that arises from the difference between the actual and budgeted (standard) variable overhead rate.

- Definition of variable spending variance
- Budgeted overhead rate
- Formula
- Example
- Favorable and unfavorable variance

## Budgeted Factory Overhead Rate

For better control and faster recording of overhead costs, a standard rate may be used and applied based on machine hours, labor hours, or some other applicable basis. This is known as **budgeted factory overhead rate** or **application rate**.

For further control, an application rate may be established separately for variable and fixed overhead costs.

## Formula

The formula for variable factory overhead (VFOH) spending variance is:

*VFOH spending variance = (AR - BR) x AB*

where: AR = actual rate, SR = budgeted rate, and AB = actual allocation base.

It may also be expressed as: * (AR x AB) - (BR x AB)*, or *Actual VFOH - (BR x AB)*, since the actual cost is equal to the actual rate multiplied by the actual allocation base.

The budgeted rate (*BR*) is equal to the budgeted cost divided by the budgeted allocation base. The actual rate (*AR*) is equal to actual cost divided by actual base.

The most commonly used allocation bases are: **labor hours **and** machine hours**. Generally, *labor hour* is adopted by labor-intensive industries, and *machine hour* by capital-intensive industries. Other bases are also used.

## Example

XYZ Company has a variable factory overhead budget of $1,320,000 in producing 120,000 units of its product. One unit requires 2.75 labor hours to complete -- a total of 330,000 hours. Hence, the application rate for VFOH is $4 per labor hour (1,320/330). Last month, XYZ produced 9,600 units and employed 29,000 direct labor hours. The actual variable factory overhead is $121,800. Compute for the variable spending variance.

VFOH spending variance | = | (AR - BR) x AB |

= | ($4.20 - $4.00) x 29,000 hours | |

VFOH spending variance | = | $5,800 unfavorable |

The actual rate of $4.20 is computed by dividing the total actual VFOH cost by the actual base ($121,800 divided by 29,000 hours).

The variance may also be computed as:

VFOH spending variance | = | Actual VFOH - (BR x AB) |

= | $121,800 - ($4.00 x 29,000 hours) | |

VFOH spending variance | = | $5,800 unfavorable |

## Favorable and Unfavorable VFOH Spending Variance

If the actual rate is higher than the budgeted rate, the company paid more dollars per allocation base than it anticipated; hence, the variance is **unfavorable**. If the actual rate is lower than the budgeted rate, the variance is **favorable**.