Overhead Variances

The overhead variances can be divided into fixed and variable. Fixed costs should remain constant other than in exceptional circumstances, such as a rent or rates increase. Variable overheads however can be further subdivided into efficiancy and expenditure variances.

As with the labour and material variances, we are comparing actual performance and activity with our standards (i.e. the performance and activity we expect to happen). Quite often, in practice, overheads are absorbed on a time basis, i.e. a rate per hour is used for overheads to be included in job costs etc. This is also the case when looking at overhead variances and we use a measure of activity called 'standard hours of production' (SHP). This is a quantity measure not a time measure.

e.g. Labour standards state 3 hours to produce 1 unit.
  If we produce 12 units we have 36 SHP (i.e. 3 hours x 12 units).