CIMA BA2 Syllabus C. PLANNING AND CONTROL - Variable Overhead Variances - Notes ^{5 / 9}

Variable Overhead Variances

An example of a variable overhead is electricity.

The more work that is done in our factory, the more electricity will be used, therefore it is common to base the variable overheads on labour hours, as we will see below.

We will always use the labour hours worked not the labour hours paid to calculate the variable overhead variances.

The variable production overhead total variance can be subdivided as follows:

ACCA MA D2d Total Variable Overhead Variance graph

variable overhead total variance =	actual units should have cost	$x
	actual units did cot	$x
		---------
	var overhead total variance	$x (f/a)
		---------

variable overhead expenditure variance =	actual hrs should cost	$x
	actual hrs did cost	$x
		---------
	var overhead exp variance	$x (f/a)
		--------

variable overhead efficiency variance =	actual units shd have taken	x hrs
	actual units did take	x hrs
		--------
	efficiency variances in hrs	x hrs (f/a)
	x standard rate per hr	$x
		---------
	efficiency variance in $	$x (f/a)
		======

Illustration - Variable overhead expenditure variance

Variable overhead rate/hour $2
Actual hours worked 44,100
Actual amount paid for actual hours worked $100,000

What is the variable overhead expenditure variance?

Solution

44,100 should pay 44,100 x $2= $88,200
Did pay $100,000

Variable overhead expenditure variance is $11,800 Adverse (Paid more than should have)

Illustration - Variable overhead efficiency variance

Actual production 8,900 units
Standard hours/unit 5
Variable overhead rate/hour $2
Actual hours worked 44,100

What is the variable overhead efficiency variance?

Solution

Should work 8,900 x 5 hours = 44,500 hours
Did work 44,100

Variable overhead efficiency variance is 400 hours x $2/hour = $800 Favourable (We paid less than we should have)

Illustration

Standard cost card for the production of 1 car

Direct Labour 10 hours at $100/hour = $1,000
V. Ovhd 10 hours at $10/hour = $100

Actual results for the production of 10 cars

Variable overhead cost $1,200

110 hours costing $11,000 (Labour)

What are the variable overhead variances?

Variable overhead expenditure variance
110 hours should cost x $10 = $1,100
110 hours did cost $1,200
($100) Adverse variance
Variable overhead efficiency variance
10 cars should take x 10 hours = 100 hours
10 cars did take 110 hours
10 hours (Adverse) x $10 = ($100) Adverse
Total variable overhead variance ($100) + ($100) = ($200) Adverse