Overview

• What you’ll learn: How variable overhead is allocated, the variable overhead spending variance, the variable overhead efficiency variance, and how these differ from direct-cost variances.
• Prerequisites: Lesson 5 — Direct-Cost Variances
• Estimated reading time: 15 minutes

Introduction

The Grand Historian records: Direct costs are the soldiers visible on the battlefield — you can count them, weigh them, and trace their movements. Variable overhead is the supply train behind the lines — it moves with the army but is harder to attribute to any single battalion. Lubricants, utilities, indirect materials, and minor maintenance all qualify as variable overhead: costs that rise with production volume but cannot be traced to individual units with surgical precision.

Horngren (Chapter 8) teaches that variable overhead variances follow the same two-column framework as direct costs, but the interpretation differs because variable overhead is allocated via an allocation base (typically direct labor hours or machine hours) rather than traced directly.

Variable Overhead Rate and Allocation

The standard variable overhead rate is calculated during the budgeting process:

Standard Variable OH Rate = Budgeted Variable OH Costs / Budgeted Allocation Base (e.g., DLH)

For example, if budgeted variable overhead is $200,000 and budgeted direct labor hours are 50,000, the rate is $4 per DLH.

Variable Overhead Spending Variance

VOH Spending Variance = (Actual VOH Rate − Standard VOH Rate) × Actual Allocation Base

Or equivalently: Actual VOH − (Standard Rate × Actual Hours)

This variance measures whether the actual cost per unit of the allocation base deviated from standard. Unlike direct materials price variance (which reflects a single input price), the VOH spending variance is an aggregate of many individual overhead items — each potentially moving in different directions.

Causes of unfavorable spending:

• Utility rate increases beyond budget
• Higher indirect material costs
• Unplanned maintenance on production equipment
• Inefficient use of indirect resources

Variable Overhead Efficiency Variance

VOH Efficiency Variance = (Actual Allocation Base − Standard Allocation Base Allowed) × Standard VOH Rate

This variance mirrors the direct labor efficiency variance when labor hours are the allocation base. If workers take more hours than standard, variable overhead is also higher — because the allocation base itself is inefficient.

太史公曰：When the supply train follows a slow army, it consumes more provisions per mile. The inefficiency is in the army’s pace, not the train’s provisioning. Similarly, the VOH efficiency variance is driven by the efficiency of the allocation base (labor or machines), not by overhead spending itself.

Comparison with Direct-Cost Variances

Using VOH Variances for Improvement

Because the spending variance aggregates multiple costs, investigation requires drilling into individual line items. A $10,000 unfavorable spending variance might contain $15,000 unfavorable utilities offset by $5,000 favorable indirect materials — the net number conceals the detail.

The efficiency variance, being driven by the allocation base, is often investigated alongside the direct labor efficiency variance — they share the same root cause.

Key Takeaways

• Variable overhead is allocated via a cost driver (DLH, machine hours), not directly traced.
• VOH spending variance = actual overhead vs. standard rate applied to actual hours.
• VOH efficiency variance = driven by efficiency of the allocation base, not overhead spending.
• Spending variance aggregates many costs — investigation requires line-item drill-down.
• Efficiency variance shares root causes with direct labor efficiency variance.

What’s Next

In Lesson 7, we cross from the shifting sands of variable overhead to the granite fortress of fixed overhead variances.