Variable manufacturing overhead standards and variances

Variable manufacturing overhead standards are set using direct labor hours or machine hours. If the business is highly labor intensive, the direct labor hours are used and if the business is highly mechanized, the machine hours may be used as base of variable manufacturing overhead standards.

Suppose the variable portion of predetermined overhead rate is $6 and a unit of product takes 3.5 direct labor hours to complete, the standard variable manufacturing overhead cost would be computed as follows:

= Direct labor hours per unit × Variable portion of predetermined overhead rate
= 3.50 × $6.00
= $21.00

Variable manufacturing overhead variances:

Two important variable manufacturing overhead variances are:

1. variable overhead spending variance
2. variable overhead efficiency variance

The formulas that are used to calculate these variable overhead variances are as follows:

Variable overhead spending variance = (Actual hours worked × Actual overhead rate) – (Actual hours worked × Standard overhead rate)

Variable overhead efficiency variance = (Actual hours worked × Standard overhead rate) – (Standard hours allowed × Standard overhead rate)

Notice that the above two formulas are very similar to direct labor rate variance and direct labor efficiency variance formulas.

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