OVERHEAD VARIANCES

INTRODUCTION: The variances that we calculate are all value variances i.e. any Variance that we calculate is the difference between two values.

Variance = Value1 Value2 Variance = (Quantity1 Price1) (Quantity2 Price2) [Since Value = Quantity Price.]

Classification: Adverse/Negative/Unfavorable Variance The variance is said to be either negative () or Adverse (Adv) or Unfavorable (Unf) if it indicates a loss.

In relation to costs, we would incur a loss if the actual cost is greater than the standard cost. In relation to profits or incomes, we would incur a loss if the actual profit or income is less than the standard.

This type of variance is indicated by either a negative sign () placed before the value of the variance or by writing the letters UF or Unf or Adv after the value. Positive/Favourable Variance: The variance is said to be either Positive (+/Pos) or Favourable (Fav) if it indicates a gain position or beneficial position.

In relation to costs, we would gain if the actual cost is less than the standard cost. In relation to profits or incomes, we would gain if the actual profit or income is greater than the standard.

This type of variance is indicated by either a positive sign (+) placed before the value of the variance or by writing the letters Fav or F or Pos after the value.

Overhead Variance The difference between the absorbed overhead and incurred overhead is what we call the under/over absorbed overhead. Overhead variance is nothing but this. We call this the Total Overhead Cost Variance. This would give an idea of how much more or less cost had been incurred when the actions are compared to plans. However, it does not give a scope for pin pointing the responsibility for the variance and thereby take corrective actions. We cannot identify whether the difference is on account of the labourers/laborers working inefficiently (in which case, the people who manage work should be held responsible) or on account of more or less expenditure being incurred (in which case the people responsible for incurrence of expenses are to be held responsible). Therefore, the Total Overhead Cost Variance is further analysed into its constituent parts to give an idea of the overhead variances in various other angles. The analysis of the total overhead cost variance into its constituent parts gives an idea of the overhead variances in various other angles. The possibility for this arises on account of the fact that there are three types of costs involved with regard to overhead variances. The Budgeted overhead cost, the incurred overhead cost and the absorbed overhead cost. The concept of absorption brings in a different angle in analysing variances, more so in case of fixed overhead variances. All the variances involving overheads which are collectively called "Overhead variances" and their inter relationships are depicted in the illustration below:

Overhead variance represents the difference between the actual overhead cost incurred and standard overhead cost for a given output. The formula for the measurement of overhead variance (OV) will be:

OV = (Standard overheads) - (Actual overheads) Variable overhead variance captures that part of variance which is directly related to production.

TOHCV Total Overhead Cost Variance

VOHCV Variable Overhead Cost Variance

FOHCV Fixed Overhead Cost Variance

VOHEfV VOHExV Variable Overhead Variable Overhead Efficiency Expenditure Variance Variance

FOHVV FOHEV Fixed Overhead Fixed Overhead Volume Expenditure Variance Variance

Capacity variance

Calendar variance

Efficiency variance

Variable And Fixed Overhead Variances Variable overhead variance measures the overheads that could be identified as varying with the output. The formula for the measurement of variable overhead variance (VOV) will be: VOV = (Actual Output*Standard variable overheads - Actual variable overheads).

Fixed overhead variance measures that part of overhead variance which does not alter in a given time context. The formula for the measurement of fixed overhead variance (FOV) will be:

FOV = (Actual Output*Standard fixed overhead - Actual fixed overhead).

Fixed And Variable Overhead Variance Example Fixed overheads: Budgeted Rs.3,000; Actual Rs.3,000 Variable overheads: Budget Rs.1,500; Actual Rs. 3,000 Output: Budgeted 3,000 units; Actual 2,500 units

Variable Overhead Variance (VOV): Variable overhead variance = (Standard variable overhead - Actual variable overhead) VOV = (SVO AVO) = (2500*(1500/3000) 3000) = Rs. 1,750 Unfavourable. Fixed Overhead Variance (FOV): Fixed overhead variance = (standard fixed overhead actual fixed overhead) FOV = (SOV - AOV) = (2500 x [3000/3000] 3000 = Rs.500 Unfavourable Total Overhead Variance = VOV + FOV = Rs.2,250 unfavorable Problem: A factory was to budgeted to produce 2,000 units of output @ one unit per 10 hours productive time working for 25 days. Rs. 40,000 of variable overhead cost and Rs. 80,000 of fixed overhead cost were budgeted to be incurred during that period.

The factory worked for 26 days putting in 860 hours work every day and achieved an output of 2,050 units. The expenditure incurred as overheads was Rs. 49,200 as variable overheads and Rs. 86,100 as fixed overheads.

This information is provided by Total Overhead Cost Variance: The problem data arranged in a working table:

Particulars a) Output b) Working Days c) Total Time Worked (in hrs) d) Overhead Cost (in Rs.) Variable Fixed Total e) Overhead Rates [(d) (a)] (in Rs./Unit) Variable [(40,000 2,000)] Fixed [(80,000 2,000)] Total [(1,20,000 2,000)] f) Overhead Rates [(d) (c)] (in Rs./hr) Variable [(40,000 20,000)] Fixed [(80,000 20,000)] Total [(1,20,000 20,000)]

Budgeted Actual 2,000 25 20,000 2,050 26 22,360

40,000 80,000 1,20,000

49,200 86,100 1,35,300

20 40 60

2 4 6

Note This working table gives all the data that would be needed to solve a problem involving all overhead variances. In Calculating only the total overhead cost variance you may not need all that data. We give it here so that you get accustomed to preparing the working table by the time you complete going through all the overhead variances.

Working Time Budgeted Time [BT] BT = Budgeted Output Budgeted Time/unit = 2,000 units 10 labor/labour hrs/unit [@ one unit per 10 hours productive time]

= 20,000 labor/labour hrs Actual Time [AT] AT = Number of Days Actual Time/day = 26 days 860 labour/labor hrs/day = 22,360 labor/labour hrs

Illustration for the calculation of Fixed Overhead Variances: From the following information compute: a) Fixed Overheads Variance b) Expenditure Variance c) Volume Variance d) Capacity Variance e) Efficiency Variance

Budget Fixed Overheads for November Units of Production in November Standard Time for 1 Unit Actual Hours Worked Rs.20,000 10,000 2 hours

Actual 20,400 10,400

20,100 hours

Solution:
Standard Time = 10,000*2 = 20,000 hours

Fixed Overheads Rate = 20,000/20,000 = Re. 1

a) Fixed Overheads Variance = Actual Hours* Fixed Overheads Rate Actual Fixed Overheads = 20,100*1 20,400 = Rs.300 Unfavourable b) Expenditure Variance = Budgeted Fixed Overheads Actual Fixed Overheads = 20,000 20,400 = Rs.400 Unfavourable c) Volume Variance = Actual Hours Worked*Fixed Overheads Rate Budgeted Fixed Overheads = 20,100*1 20,000 = Rs.100 Favourable

d) Capacity Variance = Fixed Overheads Rate (Revised Budgeted Hours Budgeted Hours) Revised Budgeted Hours = (20,000/10,000)*10,400 = 20,800 hours Capacity Variance = 1(20,800 20,000) = Rs. 800 Favourable e) Efficiency Variance = Fixed Overheads Rate (Actual Hours Revised Standard Hours) = 1(20,100 20,800) = Rs. 700 Unfavourable

Verification: a) Fixed Overheads Variance = Expenditure + Volume Variance - 300 - 300 = -400 + 100 = -300

b) Volume Variance

= Capacity variance + Efficiency Variance + 100 = + 800 700 + 100 = + 100

Illustration for calculation of variable overhead variance: Data: Budgeted Production for January, 2008 Budgeted Variable Overhead Standard Time for One Unit Actual Production for January, 2008 Actual Hours Worked Actual Variable Overhead 3000 units Rs. 15,000 2 hours 2,500 units 4500 hours Rs. 13,500

Solution: 1. Variable Overhead Cost Variance (VOCV)

VOCV Overhead

= Actual Output*Standard Variable Overhead Rate Actual Variable = Rs. (2500*5) 13500 = Rs. 1000 (Adverse)

(Standard Variable Overhead Rate = Rs.) 15000/3000 = Rs. 5 per unit

2. Variable Overhead Expenditure or Spending Variance (VOSV) VOSV Overhead = (Actual Hours* Standard Variable Overhead Rate) - Actual Variable

= Rs.(4500*2.50) -13500 = Rs. 11250 -13500 = Rs. 2250 (Adverse) 3. Variable Overhead Efficiency Variance (VOEV) VOEV = Standard Variable Overhead Rate (Standard Hours for Actual Output Actual Hours) = Rs. 2.50 (5000 4500) = Rs. 1250 (Favourable)

INDEX
SNo
1. 2. 3. 4.

Particulars
Introduction Classification Overhead Variance Variable And Fixed Overhead Variances Illustration for the calculation of Fixed Overhead Variances Illustration for calculation of variable overhead variance Conclusion References

5.

6.

7. 8.

References: Book: Principles and Practice- Shashi K. Gupta, R.K. Sharma Book: Cost Accounting Khan and Jain Websites: www.wikipedia.org www.managementparadise.com www.scribd.com

CONCLUSION: Overhead variance would give an idea of how much more or less cost had been incurred when the actions are compared to plans. However, it does not give a scope for pin pointing the responsibility for the variance and thereby take corrective actions. Overhead variance represents the difference between the actual overhead cost incurred and standard overhead cost for a given output