Overhead Cost Variances

The total overhead cost variance is the difference between the standard cost of overhead allowed for the actual output achieved and the actual overhead cost incurred. In other words, overhead cost variance is the under or over absorption of overheads.

However before we proceed to study these variances, we should aware about the basic terms used in the computation of overhead variance:

Standard overhead rate (per unit) = Budgeted overhead / Budgeted output in units

Standard overhead rate (per hour) = Budgeted overhead / Budgeted hours

Standard hours for actual output = Budgeted hours / Budgeted output x Actual output

Standard output for actual hours = Budgeted output (in units)  / Budgeted hours x Actual hours

Absorbed (or Recovered) overhead = Standard Rate per hour × Actual Output Or standard rate per unit × standard hours for actual output

Budgeted overhead = Budgeted output × Std. overhead rate per unit Or Budgeted hours × Std. overhead rate per hour

(vii) Standard overhead = Std. output for actual time × Std. overhead rate per unit Or Actual hours × Std. overhead rate per hour

Actual overhead = Actual output × Actual overhead rate per unit Or Actual overhead = Actual output × Actual overhead rate per unit

Overhead Cost Variance

[Actual Output × Standard Overhead Rate per Unit] – Actual Overhead Cost

OR

[Standard Hours for Actual Output × Standard Overhead Rate Per Hour] – Actual Overhead Cost

Overhead cost variances can be classified as:

• Variable overhead variance
• Fixed overhead variance