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:
|
