Overhead cost variance

Management accounting

1. Overhead cost variance Prepared by, Pawan Kumar Gupta, Assistant Professor, Department of Commerce, MGGAC, Mahe

2. Overhead cost variance An overhead cost variance is the difference between the amount of overhead applied during the production process and the actual amount of overhead costs incurred during the period. The overhead cost variance can be calculated by subtracting the standard overhead applied from the actual overhead incurred during the period. In simple words, OHCV= Standard overhead- Actual overhead

3. Classification of Overhead cost Variance

4. Explanation Variable overhead cost variance:- It is the variance or deviation in between the standard variable overhead for actual production of units and Actual overhead incurred. VOCV= Standard variable overhead rate per unit × Actual output – Actual variable overheads incurred 2. Variable overhead expenditure variance:- This is the variance in between the two different rates of variable overheads viz. standard rate and actual rate; denominated in terms of Actual hours taken consumed by the firm. VOEV= Actual Hours (Standard Rate – Actual Rate)

5. 3. Variable overhead efficiency variance:- It is another variance which is in between the standard hours for actual output and actual hours consumed during the production; denominated in terms of standard rate. = Standard Rate (Standard Hours for Actual Output – Actual Hours)

6. Fixed overhead cost variance Fixed overhead cost variance depends on (a) fixed expenses incurred and (b) the volume of production obtained. The volume of production depends upon, efficiency. (ii) the days for which the factory runs in a week (calendar variance) (iii) capacity of plant for production (Capacity variance). FOCV= Actual Output (Fixed Overhead Rate - Actual Fixed Overheads)

7. (a) Fixed Overhead expenditure Variance- It is also known as budget variance . It is that portion of the fixed overhead which is incurred during a particular period due to the difference between the budgeted fixed overheads and the actual fixed overheads . Fixed Overhead expenditure variance =Budgeted fixed overhead-Actual fixed overhead (b) Fixed Overhead Volume Variance- This variance is the difference between the standard cost of overhead absorbed in actual output and the standard allowance for that output. This variance measures the over of under recovery of fixed overheads due to deviation of actual output form the budgeted output level. This variance contains three sub variance, ( i )- Efficiency variance, (ii)- Capacity variance and, (iii)- Calendar variance

8. ( i ) On the basis of units of output- Fixed Overhead Volume Variance = Standard Rate (Budgeted Output-Actual Output) OR =(Budgeted Cost –Standard Cost) (ii) On the basis of standard hours- Fixed Overhead Volume Variance =Standard Rate per hour (Budgeted Hours-Standard Hours) , We can calculate total fixed overhead volume variance as under

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