CIMA P1 Syllabus A. Cost Accounting For Decision And Control - Variable Overhead Total, Expenditure And Efficiency Variance - Notes 5 / 12
Variable Overhead Variances
The variable production overhead total variance can be subdivided into the variable production overhead expenditure variance and the variable production overhead efficiency variance (based on actual hours).
| 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) | |
| ====== |
The variable production overhead expenditure variance is the difference between the amount of variable production overhead that should have been incurred in the actual hours actively worked, and the actual amount of variable production overhead incurred.
The variable production overhead efficiency variance is exactly the same in hours as the direct labour efficiency variance, but priced at the variable production overhead rate per hour.
| variance | favourable | adverse |
| variable overhead expenditure | savings in costs incurred more economical use of overheads | increase in cost of overheads used excessive use of overheads change in type of overheads |
| variable overhead efficiency | labour force working more efficiently (favourable labour efficiency) better supervision or staff training | labour force working less efficiently (adverse labour efficiency) lack of supervision |
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)