Variable overhead rate variance

Definition

Variable overhead rate variance is the difference between the actual variable overhead costs incurred and the standard variable overhead costs based on the actual hours worked. It helps in evaluating the efficiency of a company's cost control related to variable overheads.

5 Must Know Facts For Your Next Test

1. Variable overhead rate variance is calculated by multiplying the difference between actual and standard rates by the actual hours worked.
2. A favorable variance indicates that less was spent on variable overheads than expected, while an unfavorable variance indicates higher spending.
3. It is one component of total variable overhead variance, with the other being variable overhead efficiency variance.
4. This variance helps managers assess how well they are controlling costs that vary with production levels.
5. Common causes of variable overhead rate variances include changes in utility rates, indirect labor costs, and supply prices.

Review Questions

• How do you calculate variable overhead rate variance?
• What does a favorable variable overhead rate variance indicate?
• What are some common causes of an unfavorable variable overhead rate variance?

Related terms

Standard Cost:

A predetermined cost that serves as a benchmark for measuring performance.

Variable Overhead Efficiency Variance:

The difference between the actual hours worked and standard hours allowed, multiplied by the standard variable overhead rate.

Total Variable Overhead Variance:

The sum of the variable overhead rate variance and the variable overhead efficiency variance.