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Overhead Spending Variance:

Definition and Explanation:

Overhead spending variance is the difference between actual expenses incurred and the budgeted allowance based on actual hours worked.

If actual expenses incurred are more than budgeted allowance based on actual hours worked, an unfavorable spending variance occurs.

If actual expenses incurred are less than budgeted allowance based on actual hours worked, a favorable spending variance occurs.

Overhead spending variance is calculated when overall or net overhead variance is further analyzed using three variance method. Other two variances that are calculated in three variance method are overhead idle capacity variance and overhead efficiency variance.

Formula:

Following formula is used for the calculation of this variance:

Spending variance = Actual factory overhead - Budgeted allowance based on actual hours worked

Example:

From the following data calculate factory overhead spending variance:

Actual overhead   $7,384
Actual hours worked   3,475
Units produced during the period   850
Standard hours for one unit   4
Standard factory overhead rate:    
     Variable

$1.20

 
     Fixed

$0.80

$2.00
 
 
Normal Capacity in labor hours   4000 hours

Solution:

Actual factory overhead   $7,384
Budgeted allowance based on actual hours worked:    
   Fixed expenses budgeted $3,200  
   Variable expenses (3,475* actual hours worked $1.20 variable overhead rate) 4,170 $7,370
 

Spending variance   $14 unfav
   

This variance consists of variable expense only and can also be computed as follows:

Actual variable expenses ($7,384 - $3,200) $4,184
Allowed variable expenses for actual production 4,170
 
Spending variance $14 unfav
 

Who is Responsible For Spending Variance?

The spending variance is the responsibility of the department manager, who is expected to keep actual expenses within the budget.

Relevant Articles:

Definition and Explanation of Standard Cost
Purposes and Advantages of Standard Costing System
Setting Standards
Materials Price Standard
Materials Price Variance
Materials Quantity Standard
Materials Quantity Variance
Direct Labor Rate Standard
Direct Labor Rate Variance
Direct Labor Efficiency Standard
Direct Labor Efficiency Variance
Factory Overhead Cost Standards
Overall or Net Factory Overhead Variance
Overhead Controllable Variance
Overhead Volume Variance
Overhead Spending Variance
Overhead Idle Capacity Variance
Overhead Efficiency Variance
Variable Overhead Efficiency Variance

Fixed Overhead Efficiency Variance

Mix and Yield Variance
Variance Analysis Example
Standard Costing and Variance Analysis Formulas
Management by Exception and Variance Analysis
International Uses of Standard Costing System
Advantages, Disadvantages, and Limitations of Standard Costing

 

 

 

 

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Financial Accounting Topics


  Introduction to Accounting
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  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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Managerial Accounting Topics

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  Standard Costing and Variance Analysis
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  Balanced Scorecard
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  Capital Investment Analysis/Capital Budgeting
 
 

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