OVERHEAD VARIANCE
An overhead variance analysis focuses on the difference between actual and budgeted overhead expenses. Variable overhead variances are due to unplanned differences in the cost and efficient use of overhead. Fixed overhead variances, on the other hand, are due to differences in costs and production volume.
BENEFITS OF AN OVERHEAD VARIANCE ANALYSIS
An overhead variance analysis provides valuable insight as to why your company fell short of or exceeded direct labor cost expectations. This insight allows your organization to make timely adjustments in light of changing circumstances and facilitates more accurate future planning.
THE OVERHEAD VARIANCE ANALYSIS PROCESS
- Compile budgeted and actual overhead allocation and rate data
- Calculate variable overhead spending and efficiency variances
- Calculate fixed overhead spending and production volume variances
- Review the results for abnormalities
- Investigate the abnormalities if they exist
FURTHER READING
These links elaborate on the topic at hand. They serve as a good starting point for those companies that would like to learn more or would like to address these topics “in house.” For those firms that prefer to continue to focus on their current responsibilities and would value the objective viewpoint of a professional from outside of the organization, click here.
Variable Overhead Efficiency Variance Formula | Calculation | Example | Definition | Explanation
Excerpt: “When companies adopt four variance analysis approach they divide the overhead efficiency variance (which is calculated when three variance approach is used) into its variable and fixed components.”
Fixed Overhead – Standard Cost and Variances
Excerpt: “Recall that the fixed manufacturing overhead (such as the large amount of rent paid at the start of every month) must be assigned to each apron produced. In other words, each apron must absorb a small portion of the fixed manufacturing overhead.”
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