Variable Overhead Cost Variances

Learning Objective 3 Compute the variable overhead flexible-budget variance, the variable overhead efficiency variance, and the variable overhead spending variance

difference between actual variable overhead costs and flexible-budget variable overhead amounts
difference between actual quantity of cost-allocation base and budgeted quantity of cost-allocation base
difference between actual variable overhead cost rate and budgeted variable overhead cost rate

We now illustrate how management accountants use the budgeted variable overhead rate to compute Webb’s variable overhead cost variances. The following data are for April 2020, when Webb produced and sold 10,000 jackets:

A table shows data for April 2020 for Webb Company

The table depicts actual result and flexible-budget amount for output units, machine-hours per output unit, machine-hours (output units times machine-hours per output unit), variable overhead costs, variable overhead costs per machine hour (variable overhead costs divided by machine-hour), and variable overhead costs per output unit (variable overhead costs divided by output units). The details of the table are as follows:

1. Output units (jackets)

Actual result: 10,000
Flexible-budget amount: 10,000

2. Machine-hours per output unit

Actual result: 0.45
Flexible-budget amount: 0.40

3. Machine-hours (output units times machine-hours per output unit)

Actual result: 4,500
Flexible-budget amount: 4,000

4. Variable overhead costs

Actual result: 130,500 dollars
Flexible-budget amount: 120,000 dollars

5. Variable overhead costs per machine hour (variable overhead costs divided by machine-hour)

Actual result: 29.00 dollars
Flexible-budget amount: 30.00 dollars

6. Variable overhead costs per output unit (variable overhead costs divided by output units)

Actual result: 13.05 dollars
Flexible-budget amount: 12.00 dollars

As we saw in Chapter 7, the flexible budget enables Webb to highlight the differences between actual costs and actual quantities versus budgeted costs and budgeted quantities for the actual output level of 10,000 jackets.

Flexible-Budget Analysis

The variable overhead flexible-budget variance measures the difference between actual variable overhead costs incurred and flexible-budget variable overhead amounts.

$\begin{array}{ccl} \begin{matrix} Variable overhead \\ flexible‐budget variance \end{matrix} & = & \begin{matrix} Actual costs \\ incurred \end{matrix} - \begin{matrix} Flexible‐budget \\ amount \end{matrix} \\ = & $ 130,500 - $ 120,000 \\ = & $ 10,500 U \end{array}$

This $10,500 unfavorable flexible-budget variance means Webb’s actual variable overhead exceeded the flexible-budget amount by $10,500 for the 10,000 jackets actually produced and sold. Webb’s managers would want to know why. Did Webb use more machine-hours than planned to produce the 10,000 jackets? If so, was it because workers were less skilled than expected in using machines? Or did Webb spend more on variable overhead costs, such as maintenance?

Just as we illustrated in Chapter 7 with the flexible-budget variance for direct-cost items, Webb’s managers can get further insight into the reason for the $10,500 unfavorable variance (denoted U in this text) by subdividing it into the efficiency variance and spending variance.