Jobs or processes
are charged with with costs on the basis of standard
hours allowed multiplied by the standard factory
overhead rate. The standard hours allowed figure is
determined by multiplying the labor hours required
to produce one unit (the standard labor hour per
unit) times the actual number of units produced
during the period. The units produced are the
equivalent units of production for the department
factory overhead being analyzed. At the end of each
month, overhead actually incurred is compared with
the expenses charged into process using the standard
factory overhead rate. The difference between these
two figures is called overall factory overhead
variance or net factory overhead variance.
From the following
data calculate factory overhead overall (net)
produced during the period
Standard hours for one unit
Standard factory overhead rate
The overall or net
factory overhead variance is computed below:
Overhead charged to production (3400*
standard hours allowed × $2 standard
Overall (or net) overhead variance.
equivalent units produced × 4
standard direct labor hours per unit
overall overhead variance needs further analysis
to reveal detailed causes for the variance and to
guide management toward remedial action. This
analysis may be made by using:
The two variance method
The three variance method and
The four variance method
Two Variance Method:
two variances are the controllable variance
and volume variance.
Controllable variance is the difference between
actual expenses incurred and the budget allowance
based on standard hours allowed for work performed.
Read more about controllable variance.
Volume variance represents the difference
between the budget allowance and the standard
expenses charged to work in process (Standard hours
allowed × Standard overhead rate). Read more about
Three Variance Method:
The three variances are spending variance, idle
capacity variance, and efficiency variance.
Spending variance is the difference between
actual expenses incurred and the budget
allowance based on actual hours worked. Read
more about controllable variance.
Idle capacity variance is the difference
between the budget allowance based on actual
hours and actual hours worked multiplied by the
standard overhead rate. Read more about
variance is the difference between
actual hours worked multiplied by the
standard overhead rate and the standard
hours allowed times the standard overhead
Four Variance Method:
The four variances are spending variance,
variable efficiency variance, fixed efficiency
variance, and idle capacity variance. The four
variance method divides the efficiency variance
into its fixed and variable components.