In the realm of cost accounting, understanding and analyzing overhead variances is crucial for effective cost control and decision-making. Among the various types of overhead variances, the total variable overhead variance holds significant importance. This article delves into the concept of total variable overhead variance, its components, and its significance in evaluating manufacturing costs.
Key Facts
- Definition: The total variable overhead variance is the sum of the variable overhead rate variance and the variable overhead efficiency variance.
- Variable Overhead Rate Variance: This variance measures the difference between the actual variable overhead rate and the standard variable overhead rate. It helps to determine if the costs of indirect materials involved in manufacturing are higher or lower than expected.
- Variable Overhead Efficiency Variance: This variance measures the difference between the actual activity level (such as direct labor hours) and the budgeted activity level according to the standards. It helps to determine if the actual hours worked are higher or lower than expected.
- Calculation: The total variable overhead variance is calculated by adding the variable overhead rate variance and the variable overhead efficiency variance.
- Analysis: By showing the total variable overhead cost variance as the sum of the two components, management can better analyze the two variances and make informed decisions.
Definition and Components
Total variable overhead variance is the cumulative difference between the actual variable overhead costs incurred and the standard variable overhead costs that were anticipated for a given level of production. It is the sum of two components: the variable overhead rate variance and the variable overhead efficiency variance.
Variable Overhead Rate Variance
The variable overhead rate variance measures the difference between the actual variable overhead rate and the standard variable overhead rate. This variance helps determine if the costs of indirect materials involved in manufacturing are higher or lower than expected. A favorable variance indicates that the actual costs are lower than the standard costs, while an unfavorable variance suggests the opposite.
Variable Overhead Efficiency Variance
The variable overhead efficiency variance measures the difference between the actual activity level (such as direct labor hours) and the budgeted activity level according to the standards. This variance helps determine if the actual hours worked are higher or lower than expected. A favorable variance indicates that the actual hours worked are lower than the budgeted hours, while an unfavorable variance suggests the opposite.
Calculation and Analysis
The total variable overhead variance is calculated by adding the variable overhead rate variance and the variable overhead efficiency variance. By showing the total variable overhead cost variance as the sum of the two components, management can better analyze the two variances and make informed decisions.
Significance and Implications
Analyzing the total variable overhead variance provides valuable insights into the efficiency and effectiveness of manufacturing operations. A favorable total variable overhead variance indicates that the company is effectively managing its variable overhead costs and is producing goods at a lower cost than anticipated. This can positively impact profitability and competitiveness. Conversely, an unfavorable total variable overhead variance suggests areas where cost-saving measures or process improvements can be implemented.
Conclusion
The total variable overhead variance is a critical metric for evaluating manufacturing costs and identifying opportunities for cost reduction. By understanding the components and implications of this variance, managers can make informed decisions to optimize production processes, minimize costs, and enhance overall profitability.
References
- Franklin, M., Graybeal, P., & Cooper, D. (2019). Principles of accounting, Volume 2: Managerial accounting. OpenStax. https://openstax.org/books/principles-managerial-accounting/pages/8-4-compute-and-evaluate-overhead-variances
- Hayes, A. (2021, June 7). Variable overhead spending variance: Definition and example. Investopedia. https://www.investopedia.com/terms/v/variable-overhead-spending-variance.asp
- Saylor Academy. (n.d.). Variable manufacturing overhead variance analysis. https://saylordotorg.github.io/text_managerial-accounting/s14-05-variable-manufacturing-overhea.html
FAQs
What is total variable overhead variance?
Total variable overhead variance is the cumulative difference between the actual variable overhead costs incurred and the standard variable overhead costs that were anticipated for a given level of production.
What are the components of total variable overhead variance?
Total variable overhead variance consists of two components: variable overhead rate variance and variable overhead efficiency variance.
What is variable overhead rate variance?
Variable overhead rate variance measures the difference between the actual variable overhead rate and the standard variable overhead rate. It helps determine if the costs of indirect materials involved in manufacturing are higher or lower than expected.
What is variable overhead efficiency variance?
Variable overhead efficiency variance measures the difference between the actual activity level (such as direct labor hours) and the budgeted activity level according to the standards. It helps determine if the actual hours worked are higher or lower than expected.
How is total variable overhead variance calculated?
Total variable overhead variance is calculated by adding the variable overhead rate variance and the variable overhead efficiency variance.
What does a favorable total variable overhead variance indicate?
A favorable total variable overhead variance indicates that the company is effectively managing its variable overhead costs and is producing goods at a lower cost than anticipated.
What does an unfavorable total variable overhead variance indicate?
An unfavorable total variable overhead variance suggests areas where cost-saving measures or process improvements can be implemented.
Why is analyzing total variable overhead variance important?
Analyzing total variable overhead variance provides valuable insights into the efficiency and effectiveness of manufacturing operations, helping management make informed decisions to optimize production processes, minimize costs, and enhance overall profitability.