SU8-7-Standard Costing > Variable Overheads Variances
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 |