# Accounting Assignment Help With Overhead Variances

After having studied the variance analysis consisting of material and labour variances. Let us proceed to analysis of variances relating to overheads. Now the overheads variance analysis is different from variance analysis relating to materials and labour. Here the overheads and inputs are already determined. These pre determined overheads and inputs are called the standard. The overhead is considered in terms of predetermined rate and is applied to the input. There can be different bases for the absorption of overheads e.g., labour hours, machine tools, output (in units), etc. Another important thing to be noted in case of overhead analysis is that different writers use different modes of computation of overhead variance and also different terminologies. E.g. spending variance is same as expenditure variance and volume variance is same as capacity variance.

After having discussed the preliminary aspect of overhead variance, now we go about the analysis of the overhead cost variances.

The term overhead includes indirect material, indirect labour and indirect expenses. It may relate to factory, office and selling and distribution centres. Overhead variance can be classified as sown in the following diagram: Overhead cost variance is the difference between standard cost of overhead absorbed in the output achieved and the actual overhead cost. Simply, it is the difference between total standard overheads absorbed and total actual overheads incurred. Therefore, the formula for overhead cost variance is as follows:

(OHCV)

The overhead cost variance may be divided into variable overhead cost variance and fixed overhead cost variance. Fixed cost variance may be further divided as fixed expenditure variance and fixed volume variance. Fixed volume variance may again be sub-divided into efficiency variance, capacity variance and calendar variance. Let us study, how these variances are calculated.

1. Variable Overhead Cost Variance (V.OH.C.V): This variance is the difference between the standard variable overhead and the actual variable overhead. The formula is:

Where,

= Standard hours allowed for actual output X Standard Variable Overhead Rate

Standard Variable Overhead Rate = ----------

Standard Output

It is stated earlier that there are two basic variances, price and volume. If volume does not affect the cost per unit the only variance to be calculated is price variance known as the variable overhead variance. But when assumed that variable overheads do not move directly with output, the variable overhead variances are to be calculated on similar lines as to fixed overhead variances which you will study later. In this unit, we are assuming that variable overheads do change directly with the output and infact it is the practice that many firms follow and by a number of writers on the subject.

Variable overhead cost variances arise due to the following reasons: