How to Calculate Variable Overhead Spending Variance
Calculating variable overhead spending variance is an essential part of managing costs in a business. This variance helps companies understand the differences between the expected and actual variable overhead costs, enabling them to make informed decisions to improve efficiency and profitability. In this article, we will explore the steps and formula to calculate variable overhead spending variance, along with practical examples to illustrate the process.
Understanding Variable Overhead Spending Variance
Variable overhead spending variance refers to the difference between the actual variable overhead costs incurred and the budgeted or standard variable overhead costs. It is a measure of how well a company manages its variable overhead expenses and can be either favorable or unfavorable.
A favorable variable overhead spending variance occurs when the actual costs are lower than the budgeted or standard costs. This situation indicates that the company is more efficient in managing its variable overhead expenses. Conversely, an unfavorable variance occurs when the actual costs exceed the budgeted or standard costs, suggesting inefficiencies or unexpected expenses.
Steps to Calculate Variable Overhead Spending Variance
1. Determine the actual variable overhead costs: Collect data on the actual variable overhead costs incurred during a specific period. This may include expenses such as electricity, maintenance, and other costs that vary with production volume.
2. Determine the budgeted or standard variable overhead costs: Establish the budgeted or standard variable overhead costs based on historical data, industry benchmarks, or other relevant factors. This will serve as the expected or planned variable overhead costs.
3. Calculate the variable overhead spending variance: Use the following formula to calculate the variance:
Variable Overhead Spending Variance = Actual Variable Overhead Costs – Budgeted (or Standard) Variable Overhead Costs
4. Analyze the variance: Once you have calculated the variance, analyze its implications. A favorable variance suggests that the company is performing well in managing its variable overhead costs, while an unfavorable variance indicates a need for improvement.
Example of Variable Overhead Spending Variance Calculation
Let’s say a company has budgeted $10,000 for variable overhead costs for a specific period. The actual variable overhead costs incurred were $9,500. To calculate the variable overhead spending variance, we will use the formula mentioned earlier:
Variable Overhead Spending Variance = $9,500 – $10,000 = -$500
In this example, the company has a favorable variable overhead spending variance of $500, indicating that it managed to keep its variable overhead costs below the budgeted amount.
Conclusion
Calculating variable overhead spending variance is a critical step in managing a company’s costs. By understanding the variance and its implications, businesses can identify areas for improvement and make informed decisions to enhance their operational efficiency. Regularly monitoring and analyzing this variance can help companies stay competitive and achieve long-term profitability.
