Combined Variance Analysis

Different companies use variance analysis differently. Managers in large, complex businesses, such as General Electric and Disney, use detailed 4-variance analysis to keep track of areas that are and are not operating as expected. Managers of small businesses rely more on personal observations and nonfinancial measures. They find less value from the additional measurements required for 4-variance analyses. As we saw in Chapter 2 and will see in Chapter 10, many costs such as supervision, quality control, and materials handling have both variable- and fixed-cost components that may not be easy to separate. Managers use less detailed analysis that combines the variable overhead and fixed overhead into a single total overhead cost.

When a single total overhead cost category is used, it can still be analyzed in depth. Managers still need to estimate variable-overhead costs and fixed-overhead costs to subdivide the total overhead variance into spending, efficiency, and production-volume variances. The variances are now the sums of the variable overhead and fixed overhead variances, as computed in Exhibit 8-4. The combined variance analysis follows:

The accounting for 3-variance analysis is simpler than for 4-variance analysis, but some information is lost because the variable and fixed overhead spending variances are combined into a single total overhead spending variance.

The overall Total-overhead variance is the sum of the preceding variances. In the Webb example, this equals $65,500 U. This amount aggregates the flexible-budget and production-volume variances and equals the underallocated (or underapplied) overhead costs. (Recall our discussion of underallocated overhead costs in normal costing from Chapter 4.) Using figures from Exhibit 8-4, the $65,500 U total-overhead variance is the difference between (1) the total actual overhead incurred $(\$\text{130,500}+\$\text{285,000}=\$\text{415,500})$ and (2) the overhead allocated $(\$\text{120,000}+\$\text{230,000}=\$\text{350,000})$ to the actual output produced. If the total-overhead variance were favorable, it would equal the overallocated (or overapplied) overhead costs.