Variable Overhead Expenditure Variance Formula

Variable Overhead Expenditure Variance Formula

Variable overhead expenditure has been shown below. This formula has been explained with an example.

Actual Variable Overhead x (Actual Hr - Standard Rate per Hr)

Variable Overhead Expenditure Formula Example

Total Actual Hours = 200,000

Actual Rate Per Hr = 12

Standard Rate per Hr= $ 7

Solution

Actual Hours X (Actual Rate - Standard Rate)

= 200,000 x (12 - 7)

= 200,000 x -5

=-1000,000

Significance of Variable Overhead Expenditure

Variable overheads variance is calculated to control the variable overheads expenditure. Reasons for adverse variance may be investigated and appropriate corrective actions may be taken for improving the situation (controlling the actual rate).

it is pertinent to mention that sometime rise in rate is beyond control i.e rise due to inflation in the country, but some costs can be controlled by placing appropriate control like factory lightening.

Favorable or adverse Variable overhead Expenditure

Favorable variable overhead results in when actual overhead rate is less than expected overhead expenditure rate. it is very logical (you are incurring expenditure at lower rate than expectation) Adverse Variable overheads expenditure results in, when actual expenditure rate is more than standard expenditure rate. 

Actual Rate > Standard Rate = Adverse Variable Overheads Expenditure

Actual Rate < Standard Rate = Favorable variable Overhead Expenditure

Reasons for favorable overheads expenditure variance

One of the fundamental reasons for favorable overheads expenditure variance is more effective controls over utilization of resources. Other reason of favorable overheads expenditure variance may be rates selection or application, it is important to note that Rates calculation is a complex procedure, and therefore there is possibility of inaccurate selection/application of rates.

Reasons for adverse overhead Expenditure Variance

Reasons for adverse overhead expenditure variance include the poor or inefficient utilization of resources due to ineffective controls.  Other reason of adverse overheads expenditure may be the wrong calculation application of rates (actual or standard). it is important to note that overheads rate calculation involves some easy mathematics but complex procedures.

Other Name of Variable Overhead Expenditure

Other name of variable overhead expenditure is variable overheads spending expenditure. Variable overheads expenditure variance and variable overhead spending may be used interchangeably.

Variable Overhead Expenditure Formula Practice Question

Company Actual Expenditure = 200,000

Actual Rate = 10$

Standard Rate = $ 8

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