Total variable overhead cost variance

Definition

Total variable overhead cost variance is the difference between the actual variable overhead costs incurred and the standard variable overhead costs allocated based on actual production levels. It helps managers understand whether they are spending more or less on variable overheads than planned.

5 Must Know Facts For Your Next Test

1. It consists of both the variable overhead spending variance and the variable overhead efficiency variance.
2. A favorable total variable overhead cost variance indicates that actual costs were less than standard costs, while an unfavorable variance indicates higher actual costs.
3. This variance is crucial for budgeting and controlling operational costs in manufacturing settings.
4. Calculation involves comparing actual hours worked with standard hours allowed for production, multiplied by the standard rate.
5. Identifying reasons behind variances can help improve future cost estimations and operational efficiencies.

Review Questions

• What components make up the total variable overhead cost variance?
• How would you interpret a favorable total variable overhead cost variance?
• Why is it important for managers to analyze total variable overhead cost variances?

Related terms

Variable Overhead Spending Variance: The difference between actual variable overhead costs incurred and the expected (standard) costs based on actual hours worked.

Variable Overhead Efficiency Variance: The difference between the standard hours allowed for actual production at a standard rate and the actual hours worked, multiplied by the standard rate.

Standard Costing: A system that uses standard costs for materials, labor, and overhead to assess performance by comparing them with actual costs.