'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.

Contents:
  1. Definition of variable spending variance
  2. Budgeted overhead rate
  3. Formula
  4. Example
  5. 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.

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