Variable Overheads

We can now look at the relevant overhead variances starting with variable overheads. We need to know the Variable Overhead Absorption Rate (VOAR) which would be calculated using previous units (i.e. budgeted variable overheads divided by budgeted activity level).

The following grid shows the formulae for the variable overhead variances we are concerned with:

Total Variance =

standard variable overheads
less

actual
variable overheads

Efficiency Variance =

(standard hours of production (SHP)
less

actual
labour hours) x VOAR

Expenditure Variance =

(VOAR  less actual overheads absorption rate) x actual labour hours

Example

Using the following information continuing from the previous examples, we can calculate the variable overhead variances.

Budgeted production 100 units
Standard labour hours per unit 10 hours
Actual labour hours 1100 hours
Budgeted variable overhead £1500
Actual variable overhead £1620
Actual production 105 units

First we must calculate the VOAR

i.e. Budgeted Variable Overhead  
  (Budgeted Production x Standard Hours/unit)  
     
i.e. £1,500 ÷ (100 x 10)  
     
i.e. VOAR = £1.50 per labour hour  

We can now put this data into the formulae:

Total Variance = £45 -

standard variable overheads less actual variable overheads
105 units x 10 hours/unit x £1.5/hr
= £1,575
-
£1,620

Efficiency Variance = £75 -

(SHP less actual labour hrs) x VOAR
105 units x 10 hrs/unit
= 1,050 hrs
-
1,100  
              = 50 hrs -
x
£1.50

Expenditure Variance = £30 +

(VOAR less actual overheads absorption rate)
x
actual labour hours
£1.50 - £1,620 ÷ 1,100 = £1.472727  
= £0.02727 + x 1,100
As with previous variance calculations we have either positive (+) or negative (-) variances. These are also known as favourable or adverse variances.