Variable Overhead Spending Variance

Variable Overhead Spending Variance

Variable overhead spending variance measures the difference between the actual variable overhead costs incurred and the budgeted (standard) variable overhead costs for the level of activity in a period. It helps managers evaluate how well indirect production costs (like indirect materials, supplies, and utilities tied to production) were controlled relative to expectations.

What is variable overhead?

Variable overhead includes costs that vary with production output but cannot be traced directly to individual units. Examples: consumables (paint, oil, cleaning supplies), indirect materials, and some utilities tied to machine use. This contrasts with fixed overhead (rent, salaried administration) and direct costs (direct materials, direct labor).

How it’s measured

The standard variable overhead rate is usually expressed per machine hour or per direct labor hour (DLH), depending on the production process. The spending variance compares the standard rate to the actual rate applied to the actual hours worked.

Common formulas:
– Variance = (Standard rate − Actual rate) × Actual hours
– Positive result = favorable (actual costs lower than standard)
– Equivalently: Variance = (Actual rate − Standard rate) × Actual hours
– Positive result = unfavorable (actual costs higher than standard)

Example

Given:
– Actual labor hours = 140 hours
– Standard variable overhead rate = $8.40 per direct labor hour
– Actual variable overhead rate = $7.30 per direct labor hour

Calculation:
– Difference per hour = $8.40 − $7.30 = $1.10
– Spending variance = $1.10 × 140 = $154 (favorable)

Interpretation: Actual variable overheads were $154 less than budgeted for the activity level, indicating cost savings relative to the standard.

Common causes

Favorable variance (actual < standard)
– Bulk discounts or lower prices for indirect materials
– Improved purchasing or inventory controls
– More efficient use of consumables
– Overly conservative (high) standard rates

Unfavorable variance (actual > standard)
– Rising prices for indirect supplies or utilities
– Ineffective cost controls or waste
– Increased indirect labor or overtime
– Errors in setting standard rates

Limitations and cautions

• The spending variance shows the size and direction of the difference but not the root cause; further analysis is required to diagnose reasons.
• It can be affected by changes in production mix, scale economies, or one-time events, so context matters.
• Misclassification of costs (fixed vs variable) or inaccurate standard rates will distort the variance.
• Should be used with other variances (e.g., efficiency variances) for a complete performance picture.

Use in decision making

Variable overhead spending variance is a useful control tool for managers to monitor indirect cost performance, identify cost-saving opportunities, and improve budgeting. Significant or persistent variances should trigger a follow-up analysis to determine corrective actions or to revise standards.