What is Overhead Variance Analysis?
Overhead variance analysis compares the actual manufacturing overhead a company incurred to the overhead applied to production using a standard rate. Splitting the total variance into a spending piece and a volume piece tells managers whether the problem was cost control or underused capacity.
Total overhead variance equals Actual Overhead minus Applied Overhead, where Applied Overhead is Standard Overhead Rate × Standard Hours Allowed. A positive result is unfavorable (actual overhead exceeded what was applied); a negative result is favorable.
- 1↓Actual Overhead IncurredTotal actual fixed + variable overhead cost recorded for the period
- 2↓Budgeted Overhead at Standard HoursFlexible budget overhead for the standard hours allowed — comparing this to actual gives the spending (budget) variance
- 3↓Applied OverheadStandard Overhead Rate × Standard Hours Allowed — comparing this to budgeted gives the volume (capacity) variance
- 4Total Overhead VarianceSpending Variance + Volume Variance = Actual Overhead − Applied Overhead
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Step-by-step worked examples
Actual overhead incurred was $52,000. Standard overhead rate is $10/hr, and standard hours allowed for actual output is 5,000. Find the total overhead variance.
Applied Overhead = SOHR × SH = $10 × 5,000 = $50,000 Total Variance = AOH − Applied = $52,000 − $50,000 = $2,000 Since AOH > Applied, the variance is $2,000 Unfavorable
Actual overhead was $47,000. Standard rate is $8/hr, standard hours allowed is 6,000.
Applied Overhead = $8 × 6,000 = $48,000 Total Variance = $47,000 − $48,000 = −$1,000 Since AOH < Applied, the variance is $1,000 Favorable
Actual overhead was $61,000, standard rate $12/hr, standard hours allowed 5,000.
Applied Overhead = $12 × 5,000 = $60,000 Total Variance = $61,000 − $60,000 = $1,000 Since AOH > Applied, the variance is $1,000 Unfavorable
Flashcards
Quick quiz
Q1.Actual overhead is $60,000, standard rate is $15/hr, standard hours allowed is 4,000. What is the total overhead variance?
Q2.Which two variances make up total overhead variance?
Q3.Applied overhead is calculated as…
Q4.An unfavorable volume variance suggests…
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Common mistakes
Treating total overhead variance as a single undifferentiated number. — Correct: Break it into spending and volume variances to identify whether the issue was cost control or capacity usage.
Using actual hours instead of standard hours allowed to compute applied overhead. — Correct: Applied overhead always uses standard hours allowed for the actual output, not actual hours worked.
Assuming overhead variance only involves variable costs. — Correct: Overhead variance analysis includes both fixed and variable overhead components.
Ignoring the volume variance because it seems uncontrollable. — Correct: Volume variance still matters for capacity planning, even if it is largely driven by output level rather than spending decisions.
FAQ
What is the formula for overhead variance?
Total OH Variance = Actual Overhead − (Standard Overhead Rate × Standard Hours Allowed).
How do you calculate overhead variance?
Multiply the standard overhead rate by the standard hours allowed to get applied overhead, then subtract that from actual overhead incurred.
What are examples of overhead variance?
A factory spending $2,000 more than applied overhead due to higher utility costs (unfavorable), or spending $1,000 less thanks to efficient plant operations (favorable).
What does overhead variance analysis show?
It shows whether the gap between actual and applied overhead came from poor cost control (spending variance) or underused production capacity (volume variance).