Home » Standard Costing and Variance Analysis » Overhead Spending Variance

## Definition and Explanation:

Overhead spending variance is the difference between actual expenses incurred and the budgeted allowance based on actual hours worked.

If actual expenses incurred are more than budgeted allowance based on actual hours worked, an unfavorable spending variance occurs.

If actual expenses incurred are less than budgeted allowance based on actual hours worked, a favorable spending variance occurs.

Overhead spending variance is calculated when overall or net overhead variance is further analyzed using three variance method. Other two variances that are calculated in three variance method are overhead idle capacity variance and overhead efficiency variance.

## Formula:

Following formula is used for the calculation of this variance:

 Spending variance = Actual factory overhead - Budgeted allowance based on actual hours worked

## Example:

From the following data calculate factory overhead spending variance:

 Actual overhead \$7,384 Actual hours worked 3,475 Units produced during the period 850 Standard hours for one unit 4 Standard factory overhead rate: Variable \$1.20 Fixed \$0.80 \$2.00 Normal Capacity in labor hours 4000 hours

### Solution:

 Actual factory overhead \$7,384 Budgeted allowance based on actual hours worked: Fixed expenses budgeted \$3,200 Variable expenses (3,475* actual hours worked × \$1.20 variable overhead rate) 4,170 \$7,370 Spending variance \$14 unfav

This variance consists of variable expense only and can also be computed as follows:

 Actual variable expenses (\$7,384 - \$3,200) \$4,184 Allowed variable expenses for actual production 4,170 Spending variance \$14 unfav

## Who is Responsible For Spending Variance?

The spending variance is the responsibility of the department manager, who is expected to keep actual expenses within the budget.

## Relevant Articles:

A D V E R T I S E M E N T

 Financial Accounting Topics Introduction to Accounting ---------------------------------------------------------------------------- Transactions and Accounting Equation ---------------------------------------------------------------------------- Analysis of Business Transactions ---------------------------------------------------------------------------- Journal, Ledger and Trial Balance ---------------------------------------------------------------------------- Accounting for Bills of Exchange ---------------------------------------------------------------------------- Special Journals ---------------------------------------------------------------------------- Cash Book ---------------------------------------------------------------------------- Bank Reconciliation Statement ---------------------------------------------------------------------------- Final Accounts ---------------------------------------------------------------------------- Work Sheet ---------------------------------------------------------------------------- Capital and Revenue Items ---------------------------------------------------------------------------- Valuation of Inventories ---------------------------------------------------------------------------- Accounts of Non-profit Making Organizations ---------------------------------------------------------------------------- Statement of Cash Flows ---------------------------------------------------------------------------- Accounting Ratios Analysis ---------------------------------------------------------------------------- Depreciation, Provisions and Reserves ---------------------------------------------------------------------------- Accounting Dictionary ---------------------------------------------------------------------------- Financial Calculators

 Managerial Accounting Topics Financial Statements ---------------------------------------------------------------------------- Cost Volume Profit Relationship ---------------------------------------------------------------------------- Variable Costing System ---------------------------------------------------------------------------- Materials and Inventory Cost Control ---------------------------------------------------------------------------- Activity Based Costing System ---------------------------------------------------------------------------- Standard Costing and Variance Analysis ---------------------------------------------------------------------------- Balanced Scorecard ---------------------------------------------------------------------------- Capital Investment Analysis/Capital Budgeting