C
OST
ACCOUNTING
Lesson Eight
The variances indicated above are defined as follows:
Overhead Total Variance:
Is the difference between the standard overhead cost
specified for the production achieved and the actual cost incurred.
Overhead Expenditure Variance:
Is the difference between the actual overheads
expenditure and the budgeted overheads.
Overhead Efficiency Variance:
Is the difference between the standard overhead
rate for the production achieved and the standard overhead rate for the actual
hours taken.
S
TRATHMORE
U
NIVERSITY
STUDY
PACK
Overhead Total Variance
Overhead Expenditure
Variance
Overhead Efficiency
Variance
Overhead Volume
Variance
292
293
Standard Costing
Overhead Volume Variance
Is the difference between the standard overhead cost
of the actual hours taken and the flexed budget allowance for the actual hours
taken.
The above narrations are summarized in the below formulae:
Actual Total Overheads
Expenditure
Less:
Variance
Budgeted Total Overheads
Less:
Volume
Overhead
Actual Hours x O.A.R
Variance
Total Variance
Less:
Standard Hours Produced x O.A.R
Efficiency
Variance
NB:
O.A.R = Total Overhead Absorption Rate.
Using our basic data, we can calculate the total overhead variances using the
alternative approach as follows:
Overheads Expenditure Variance = (Actual – Budgeted) Overheads
= Shs.26,030 – Shs.24,080
= Shs.1,950
Unfavourable
Overheads Volume Variance = Budgeted Overheads – (Actual Hrs x O.A.R)
= Shs.24,080 – (3,150 x 7.5)
= Shs.455
Unfavourable
Overheads Efficiency Variance = (Actual Hours x A.O.R)
–
Standard hours
x
O.A.R
produced
= (3,150 x 7.5) – (2,330 x 7.5)
= Shs.600
Favourable
*Note that this figure is arrived at by flexing the budget as follows:
Shs
Fixed Overheads:
11,480
Variable Overheads:
(3,150 x 4)
12,600
24,080
You need to keenly note that this latter method is merely a summary of the variable
and fixed overhead variances calculated earlier using the previous method as
shown below:
Expenditur
Efficiency
Capacity
Total
C
OST
ACCOUNTING
Lesson Eight
e
Variable overhead
variance
1,330 (U)
320 (F

1,010
(U)
Fixed overhead
variances
620 (U)
280 (F)
455(U)
795
(U)
Total overhead
variances as calculated
above
1,950
(U)
600
(F)
455
(U)
1,805
(U)
What was previously capacity variance is directly equivalent to the volume
variance when the total overhead approach is used.
What Causes Overhead Variances?
Overhead variances arise mainly due to the conventions of the overheads
absorption process.
The overhead absorption rates utilized in this process are
calculated form two main estimates:
i.
Estimates of expenditure levels.
ii.
Estimates of the activity levels during the budget period.
Since the two elements are mere estimates, they hardly coincide with reality, and
therefore will almost certainly cause a favourable or unfavourable variance in any
given accounting period.
Overhead variances are also caused by efficiency variations.
Because overheads
are frequently absorbed into production by means of labour hours, overhead
variances arise when labour
efficiency is greater or less than planned.
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 Spring '16
 MANZIGWE
 Cost Accounting, The Land, ........., Cost Accountant