Integrated Analysis of Overhead Cost Variances

Learning Objective 5 Show how the 4-variance analysis approach reconciles the actual overhead incurred with the overhead amounts allocated during the period

As our discussion indicates, the variance calculations for variable overhead and fixed overhead differ:

Exhibit 8-4 presents an integrated summary of the variable overhead variances and the fixed overhead variances computed using standard costs for April 2020. Panel A shows the variances for variable overhead, whereas Panel B contains the fixed overhead variances. As you study Exhibit 8-4, note how the columns in Panels A and B are aligned to measure the different variances. In both Panels A and B,

Exhibit 8-4

Columnar Presentation of Integrated 4-Variance Analysis: Webb Company for April 2020a

A table shows the Webb Company’s columnar presentation of integrated 4-variance analysis for April 2020.

The table has two parts panel A and panel B. Table shows four columns, depicting various costs and variance. The details of the panels are as follows:

Panel A: Variable manufacturing overhead

Panel B: Fixed manufacturing overhead

Panel A contains an efficiency variance; Panel B has no efficiency variance for fixed overhead. As we discussed, a lump-sum amount of fixed costs will be unaffected by the degree of operating efficiency in a given budget period.

Panel A does not have a production-volume variance because the amount of variable overhead allocated is always the same as the flexible-budget amount. Variable costs never have any unused capacity. When production and sales decline from 12,000 jackets to 10,000 jackets, budgeted variable overhead costs proportionately decline. Fixed costs are different. Panel B has a production-volume variance (see Exhibit 8-3) because Webb did not use some of the fixed overhead capacity it had acquired when it planned to produce 12,000 jackets.

4-Variance Analysis

When all of the overhead variances are presented together as in Exhibit 8-4, we refer to it as a 4-variance analysis:

A table showing a variance analysis
4-Variance Analysis
Spending VarianceEfficiency VarianceProduction-Volume Variance
Variable overhead$4,500 F$15,000 UNever a variance
Fixed overhead$9,000 UNever a variance$46,000 U

The 4-variance analysis provides the same level of information as the variance analysis for variable overhead and fixed overhead separately (in Exhibits 8-1 and 8-2, respectively) but does so in a unified presentation that also indicates those variances that are never present.

As with other variances, overhead variances are not necessarily independent of each other. For example, Webb may purchase lower-quality machine fluids (leading to a favorable variable overhead spending variance), which results in the machines taking longer to operate than budgeted (causing an unfavorable variable overhead efficiency variance), and producing less than budgeted output (causing an unfavorable production-volume variance).