overhead variance is an important chapter for accounting people. Here some easy and technical way by which one can get a easier concept about overhead variance:
STD= Standard. SOR= Standard overhead rate. NH= Normal hour. AH= Actual hour. SFOR= Standard fixed overhead rate. SVOR= Standard variable overhead rate. FOR= Fixed overhead rate. SFR= Standard fixed overhead rate.
1. Overhead cost variance=(Actual–overhead–Standard overhead).
If cost are segregate than cost variance
A. For fixed cost=(Actual fixed cost–Standard fixed cost)
B. For variable cost=(Actual variable cost–Standard variable cost).
2. Spending variance=(Actual factory overhead–Budgeted overhead).
If cost are segregate than budgeted overhead are as follows
A. For fixed overhead=(NH x SFOR).
B. For variable overhead=(AH x SVOR)
3. Volume variance= Budgeted overhead –(SH x SOR) OR
NH–(SH x SFOR) OR (Actual production–Budgeted production x FOR)
4.Capacity variance=Budgeted overhead–(AH x SOR) OR NH–(AH x SFOR) OR Budgeted production–(Standard production x SFR) OR Possible hour¬¬–(Actual hour x Standard rate per hour)
5. Efficency variance:
A. For variable overhead= AH–(SH x SVOR)
B. For fixed overhead=AH–(SH x SFOR)
C. For semi variable overhead=AH–(SH x SOR)
6. Calendar variance=Budgeted hours–(possible hours x STD overhead rate per hour)
7. Methods of overhead variance:
There are 5 variance method of overhead. There are as follows
A. One variance method= only estimated overhead.
B. Two variance method= only controllable variance + volume variance.
C. Three variance method= Spending variance + Idle variance + Efficiency variance.
D. Four variance method= Spending variance + capacity variance + Efficiency variance both variable and fixed.
Some important topic for solving math:
A. Standard variable overhead means standard variable overhead allowed for actual production.
B. Standard fixed overhead means standard fixed overhead allowed for budgeted production or standard production.
C. Standard production means standard production allowed for actual hours.
D. Normal hour means that hour allowed for budgeted production. If question does not require normal hour than budgeted production can be allowed.
E. If actual production does not require in question than standard variable overhead should be divided by normal hour and multiplied by actual hour.
F. If question does not require production than we calculate volume variance on the basis of hour.
G. If question require calendar variance than we calculate possible hour and compare with actual hour for computing capacity variance. Where possible hour= Actual working days/ Budgeted working days x Budgeted hour.
H. Budgeted production= Total hour/ hour per product.
I. Standard overhead cost= Std overhead rate x Actual production. If question does not require actual production than= Std hours x Std variable overhead rate.
J. Normal hour= Budgeted production x Std time.
K. If overhead are not segregate in question than we calculate only SOR.