Understanding Overhead Variances in Standard Costing, Lecture notes of Statistics

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Standard Costing & Variance

Analysis

Overhead Variances

• The term overhead includes indirect materials, indirect labour and indirect expenses.
• It may relate to factory, office or selling and distribution overheads.

Overhead Variance

Variable Overhead Variance Fixed Overhead Variance

Recovered or Absorbed overheads = Standard rate per unit * Actual output =Standard rate per hour * Standard hours for actual output Budgeted overheads (is for budgeted time or budgeted output) = Standard rate per unit * budgeted output = Standard rate per hour * Budgeted hours Standard overheads (Is for actual time or budgeted output in actual time) =Standard rate per unit * Standard output for actual time = Standard rate per hour * Actual Hours Actual overheads = Actual rate per unit * Actual output =Actual rate per hour * Actual hours

Overhead Cost Variance (OCV)

• It is the difference between standard overheads for actual output i.e. recovered overheads and actual overheads.
• It is the total of both fixed and variable overhead variances =Absorbed/Recovered overheads- Actual overheads = (Standard hours for actual output* Standard overhead absorption rate)- Actual overheads

Variable Overhead Expenditure Variance

• It is the difference between actual variable overhead expenditure incurred and the standard variable overheads set in for a particular period
• Also called as spending variance or Budget variance =Standard variable overheads for actual time- Actual VO = Actual Hours (Standard Variable Overhead Rate per Hour – Actual Variable Overhead Rate per Hour) = Standard VO- Actual VO

Variable Cost Variance= V O Expenditure Variance+ V O Efficiency variance

Fixed Overheads Expenditure or Budget Variance

• If higher or lower amount of overheads have been incurred in comparison to the standard fixed for the same production during the same period it will result in expenditure variance.
• It is the difference between actual expenditure and budget expenditure
• If actual is more, it will result in adverse variance and vice versa. = Budgeted overheads- Actual overheads

Fixed Overhead Volume Variance

• If the same amount of overheads have been incurred for a higher or lower production than the standard production during the same period it will result in volume variance
• It is a result of difference in the volume of production at the standard rate
• It is the difference between fixed overheads absorbed on actual output and those on budgeted output =Absorbed /Recovered Fixed Overheads- Budgeted fixed Overheads

Fixed Overhead Efficiency Variance

• Is that portion of volume variance which reflects the increased or reduced output arising from efficiency above or below the standard which is expected
• The efficiency with which the productive operations are carried out with the aid of utilised facilities is pointed out by this variance
• The cause of this variance can be variations in the method of production, efficiency of machines, quality of materials used, efficiency of tooling and working conditions, improper handling of materials, machines, improper supervision and inspection etc. = Recovered Fixed Overheads- Standard Fixed Overheads = (Std. hours for actual output-Actual hours) * Std Rate

• Fixed Overhead Capacity Variance
• Is that portion of the volume variance which is due to working at higher or lower capacity usage than the standard.
• Actual capacity of the machine or plant may vary from the planned capacity or expected capacity due to idle time, strikes, lock outs, breakdown, labour shortage, absenteeism etc. it may also be due to overtime work. Change in number of shifts of one or more machines etc.
• The variance is an indicatory of the degree of utilisation of available capacity. = Standard Fixed overheads- Budgeted Fixed Overheads = (Actual hours worked- Budgeted hours) * Std Rate

• When calendar variance is to be calculated, the method of calculating capacity variance is modified Revised Capacity Variance = (Actual No. of working days- Std. No. of working days) * Std. rate per day =Standard Overheads- Revised Budgeted overheads Revised Budgeted Overheads= Revised budgeted hours* Std. rate per hour