In analyzing manufacturing overhead variance the volume variance is the difference between the

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Types of Overhead Variances

Overhead variances arise when the actual overhead costs incurred differ from the expected amounts. Managers want to understand the reasons for these differences, and so should consider computing one or more of the overhead variances described below. Each of these variances applies to a different aspect of overhead expenditures. It is not necessary to calculate these variances when a manager cannot influence their outcome.

Fixed Overhead Spending Variance

The fixed overhead spending variance is the difference between the actual fixed overhead expense incurred and the budgeted fixed overhead expense. An unfavorable variance means that actual fixed overhead expenses were greater than anticipated. The formula for this variance is:

Actual fixed overhead - Budgeted fixed overhead = Fixed overhead spending variance

The amount of expense related to fixed overhead should (as the name implies) be relatively fixed, and so the fixed overhead spending variance should not theoretically vary much from the budget.

Fixed Overhead Volume Variance

The fixed overhead volume variance is the difference between the amount of fixed overhead actually applied to produced goods based on production volume, and the amount that was budgeted to be applied to produced goods. For example, a company budgets for the allocation of $25,000 of fixed overhead costs to produced goods at the rate of $50 per unit produced, with the expectation that 500 units will be produced. However, the actual number of units produced is 600, so a total of $30,000 of fixed overhead costs are allocated. This creates a fixed overhead volume variance of $5,000.

Variable Overhead Efficiency Variance

The variable overhead efficiency variance is the difference between the actual and budgeted hours worked, which are then applied to the standard variable overhead rate per hour. The formula is:

Standard overhead rate x (Actual hours - Standard hours)
= Variable overhead efficiency variance

 A favorable variance means that the actual hours worked were less than the budgeted hours, resulting in the application of the standard overhead rate across fewer hours, resulting in less expense being incurred. However, a favorable variance does not necessarily mean that a company has incurred less actual overhead, it simply means that there was an improvement in the allocation base that was used to apply overhead.

Variable Overhead Spending Variance

The variable overhead spending variance is the difference between the actual and budgeted rates of spending on variable overhead. The variance is used to focus attention on those overhead costs that vary from expectations. The formula is:

Actual hours worked x (Actual overhead rate - standard overhead rate)
= Variable overhead spending variance

A favorable variance means that the actual variable overhead expenses incurred per labor hour were less than expected.

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Answer Key - Quiz - Chapter 12 - MC - All Variances

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Answer Key - Quiz - Chapter 12 - Mc - All Variances

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TEST 1 TRUE/FALSE Write TRUE if the statement is correct and FALSE if it is wrong. Avoid

ERASURES.

T 1.Specifications for materials are compiled on a bill of materials.

T 2.An operations flow document shows all processes necessary to manufacture one unit of a product.

F 3.A standard cost card is prepared before developing manufacturing standards for direct materials, direct labor, and

factory overhead.

F 4.The total variance can provide useful information about the source of cost differences.

F 5.The formula for price/rate variance is (AP - SP) x SQ

F 6.The price variance reflects the difference between the quantity of inputs used and the standard quantity allowed

for the output of a period.

F 7.The usage variance reflects the difference between the price paid for inputs and the standard price for those

inputs.

T 8.The formula for usage variance is (AQ - SQ) * SP

T 9.The point of purchase model calculates the materials price variance using the quantity of materials purchased.

T 10.The difference between the actual wages paid to employees and the standard wages for all hours worked is the

labor rate variance.

F 11.The difference between the standard hours worked for a specific level of production and the actual hours worked

is the labor rate variance.

T 12.A flexible budget is an effective tool for budgeting factory overhead.

T 23.The difference between actual variable overhead and budgeted variable overhead based upon actual hours is

referred to as the variable overhead spending variance.

F 24.The difference between actual variable overhead and budgeted variable overhead based upon actual hours is

referred to as the variable overhead efficiency variance.

T 25.The difference between budgeted variable overhead for actual hours and standard overhead is the variable

overhead efficiency variance.

F 26.The difference between budgeted variable overhead for actual hours and standard overhead is the variable

overhead spending variance.

T 27.The difference between actual and budgeted fixed factory overhead is referred to as a fixed overhead spending

variance.

F 28.The difference between actual and budgeted fixed factory overhead is referred to as a fixed overhead volume

variance.

T 29.The difference between budgeted and applied fixed factory overhead is referred to as a fixed overhead volume

variance.

F 30.A fixed overhead volume variance is a controllable variance.

T 31.A fixed overhead volume variance is a noncontrollable variance.

T 32.A one-variance approach calculates only a total overhead variance

T 33.A budget variance is a controllable variance.

T 34.An overhead efficiency variance is related entirely to variable overhead

F 35.Managers have no ability to control the budget variance,

T 36.Unfavorable variances are represented by debit balances in the overhead account.

F 37.Unfavorable variances are represented by credit balances in the overhead account.

T 38.Favorable variances are represented by credit balances in the overhead account.

F 39.Favorable variances are represented by debit balances in the overhead account.

F 40.Favorable variances are always desirable for production.

F 41.Expected standards are a valuable tool for motivation and control.

T 42.Practical standards are the most effective standards for controlling and motivating workers.

F 43.Ideal standards are an effective means of controlling variances and motivating workers.

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