Total Variable Overhead Variance

Definition

The total variable overhead variance is the difference between the actual variable overhead costs incurred and the variable overhead costs that should have been incurred based on the actual level of activity. It measures the efficiency with which variable overhead resources were utilized compared to the expected level of utilization.

5 Must Know Facts For Your Next Test

1. The total variable overhead variance is calculated by subtracting the flexible budget variable overhead from the actual variable overhead.
2. A favorable total variable overhead variance indicates that the actual variable overhead costs were less than the expected variable overhead costs based on the actual level of activity.
3. An unfavorable total variable overhead variance indicates that the actual variable overhead costs were higher than the expected variable overhead costs based on the actual level of activity.
4. The total variable overhead variance can be used to identify areas where variable overhead costs are being managed effectively or ineffectively.
5. Analyzing the total variable overhead variance can help managers make informed decisions about cost control and resource allocation.

Review Questions

• Explain the purpose of the total variable overhead variance and how it is calculated.
  • The total variable overhead variance is used to measure the efficiency with which variable overhead resources were utilized compared to the expected level of utilization. It is calculated by subtracting the flexible budget variable overhead, which represents the expected variable overhead costs based on the actual level of activity, from the actual variable overhead costs incurred. A favorable variance indicates that the actual variable overhead costs were less than expected, while an unfavorable variance indicates that the actual variable overhead costs were higher than expected.
• Describe how the total variable overhead variance can be used to identify areas for cost control and resource allocation.
  • The total variable overhead variance can provide valuable insights for managers to improve cost control and resource allocation. A favorable variance suggests that variable overhead costs are being managed effectively, and managers can use this information to identify best practices and allocate resources accordingly. Conversely, an unfavorable variance indicates areas where variable overhead costs are higher than expected, prompting managers to investigate the underlying causes and implement strategies to reduce these costs, such as improving efficiency, negotiating better supplier contracts, or adjusting production processes.
• Analyze how the total variable overhead variance relates to the overall evaluation of overhead variances and the company's financial performance.
  • The total variable overhead variance is a crucial component of the overall evaluation of overhead variances, as it provides insight into the efficiency of variable overhead resource utilization. By analyzing the total variable overhead variance in conjunction with other overhead variances, such as the fixed overhead variance and the volume variance, managers can gain a comprehensive understanding of the company's overhead cost management. This information can then be used to assess the financial performance of the organization, as effective overhead cost control can directly impact profitability, cash flow, and the company's ability to remain competitive in the market. The analysis of the total variable overhead variance, along with other relevant financial metrics, can help managers make informed decisions to improve the company's overall financial health.

Related terms

Variable Overhead: Variable overhead refers to overhead costs that vary in proportion to changes in the level of production or activity, such as indirect materials, indirect labor, and utilities.

Overhead Variance: An overhead variance is the difference between the actual overhead costs incurred and the overhead costs that should have been incurred based on the actual level of activity.

Flexible Budget: A flexible budget is a budget that adjusts for changes in the actual level of activity, allowing for a more accurate comparison of actual and budgeted overhead costs.