Variable Overhead Total Variance
Definition
Variable Overhead Total Variance refers to the total difference between the standard variable overhead absorbed (based on the standard cost and the actual number of units produced) and the actual variable overhead incurred during a specific accounting period. This variance is a key component of variance analysis in management accounting and helps businesses understand discrepancies between budgeted and actual overhead costs.
Examples
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Example 1: A company has a standard cost system where the variable overhead rate is $3 per machine hour. For the month, they produce 1,000 units, utilizing 500 machine hours. The actual variable overhead cost incurred is $1,700. The total variable overhead absorbed would be \(500 , \text{machine hours} \times $3 = $1,500\). Hence, the variable overhead total variance is \( $1,500 - $1,700 = -$200\).
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Example 2: A manufacturing firm expects to incur variable overhead costs at the rate of $2 per labor hour. They produce 2,500 units, incurring 1,200 labor hours, with actual variable overhead costs amounting to $2,600. The absorbed overhead cost would be \(1,200 , \text{labor hours} \times $2 = $2,400\). Therefore, the variable overhead total variance is \( $2,400 - $2,600 = -$200\).
Frequently Asked Questions (FAQs)
The formula is:
\[ \text{Variable Overhead Total Variance} = \text{Standard Variable Overhead} - \text{Actual Variable Overhead} \]
where,
\[ \text{Standard Variable Overhead} = \text{Standard Rate per Unit} \times \text{Actual Quantity of Units Produced} \]
What causes Variable Overhead Total Variance?
Several factors can lead to this variance, including:
- Changes in production efficiency
- Variations in labor or machine hours
- Fluctuations in overhead costs such as utility rates, maintenance expenses, etc.
How is Variable Overhead Total Variance used in management?
It helps managers:
- Identify areas where overhead costs did not align with production levels
- Make informed decisions to adjust processes, improve efficiency, and manage overhead expenses better
- Evaluate the performance of cost control measures
- Standard Costing: A system that uses standard costs for production inputs and outputs, against which actual costs are compared to determine variances.
- Overhead Total Variance: The overall difference between the total standard overhead and total actual overhead during a period.
- Fixed Overhead Volume Variance: The difference between the budgeted fixed overhead and the fixed overhead absorbed by actual production.
- Efficiency Variance: The difference between the actual input quantities used and the standard input quantities allowed for actual production.
- Spending Variance: The difference between the actual costs incurred and the expected (standard) costs.
Online References
Suggested Books for Further Studies
- “Management and Cost Accounting” by Colin Drury: A comprehensive resource covering standard costing, variance analysis, and other cost accounting principles.
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren: This book provides detailed explanations and examples of various variance analyses, including overhead variances.
- “Principles of Cost Accounting” by Edward J. Vanderbeck: It includes practical insights and exercises for understanding standard costing and variance calculations.
Accounting Basics: Variable Overhead Total Variance Fundamentals Quiz
### What is Variable Overhead Total Variance?
- [x] The difference between the standard variable overhead absorbed and the actual variable overhead expenditure.
- [ ] The difference between actual direct materials and actual labor costs.
- [ ] The difference between expected and actual fixed overhead costs.
- [ ] The discrepancy between budgeted and actual sales.
> **Explanation:** Variable Overhead Total Variance measures the overall difference between the standard overhead costs allocated for actual production and the total overhead expenses incurred.
### What formula is used to calculate Variable Overhead Total Variance?
- [ ] Actual Variable Overhead × Production Units
- [x] Standard Variable Overhead − Actual Variable Overhead
- [ ] Standard Rate × Labor Hours
- [ ] Actual Overhead − Standard Fixed Overhead
> **Explanation:** The formula compares the standard variable overhead for actual production with the actual variable overhead costs incurred.
### What might cause a favorable Variable Overhead Total Variance?
- [x] Higher production efficiency
- [ ] Increased utility costs
- [ ] Lower than expected labor hours utilization
- [ ] Increase in direct material costs
> **Explanation:** Higher production efficiency can lead to lower actual variable overhead costs compared to the standard, resulting in a favorable variance.
### Which variance term is related but distinctly different from Variable Overhead Total Variance?
- [ ] Direct Material Price Variance
- [x] Overhead Total Variance
- [ ] Direct Labor Rate Variance
- [ ] Fixed Overhead Volume Variance
> **Explanation:** Overhead Total Variance encompasses both variable and fixed components, whereas Variable Overhead Total Variance focuses solely on the variable portion.
### What system frequently employs the calculation of Variable Overhead Total Variance?
- [x] Standard Costing
- [ ] Job Order Costing
- [ ] Direct Costing
- [ ] Activity-Based Costing
> **Explanation:** Standard costing systems use set standard costs and compare them with actual costs to calculate variances like Variable Overhead Total Variance.
### Why is calculating Variable Overhead Total Variance beneficial for businesses?
- [ ] It helps in raising revenue through increased production.
- [x] It aids in identifying discrepancies in overhead costs.
- [ ] It assists in measuring external market performance.
- [ ] It forecasts future sales trends.
> **Explanation:** Calculating this variance helps businesses detect areas where overhead costs did not align with production levels, enabling better cost control.
### What information do you need to calculate the Variable Overhead Total Variance?
- [ ] Sales data and profit margins
- [ ] Machine maintenance records
- [x] Standard overhead rate and actual overhead cost
- [ ] Fixed overhead budgets
> **Explanation:** Standard overhead rate and actual overhead costs are essential to determining the Variable Overhead Total Variance.
### When might an unfavorable Variable Overhead Total Variance arise?
- [ ] Reduced labor wages
- [x] Increased utility costs and underestimated hours
- [ ] Improved production efficiency
- [ ] Decreased raw material costs
> **Explanation:** Higher than expected variable overhead costs, such as electricity and maintenance, result in an unfavorable variance.
### Who typically analyzes Variable Overhead Total Variance?
- [ ] Sales Team
- [ ] Customers
- [ ] Financial analysts and managers
- [ ] Suppliers
> **Explanation:** Financial analysts and managers review this variance to manage overhead expenses and improve financial performance.
### How often should a business check its Variable Overhead Total Variance?
- [x] Monthly or quarterly as part of routine financial reviews
- [ ] Annually during the financial audit
- [ ] When customer feedback indicates issues
- [ ] Only when purchasing new equipment
> **Explanation:** Regular monthly or quarterly reviews help businesses stay on top of overhead costs and make timely adjustments if necessary.
Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!
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