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How to Deal with Overhead Variances Homework Answers?

by Jul 9, 2017Accounting

The first step for overhead variances homework answers is to remember the basics. The total variable overhead variance is the sum of variable overhead efficiency variance and variable overhead spending variance.

By definition, variable overhead efficiency variance is the difference between the real variable production overhead expenditure with the standard variable overhead expenses within a given time during product manufacture. This variance is seen by the difference in production efficiency. A simple example is the time taken to make a definitive amount of product may be significantly different from the standard time considered.

Whereas, variable overhead spending variance comes from the change in the price of the indirect materials in comparison to the budgeted price.The variance is favorable if the actual price is lower than the standard and is adverse if the actual cost is higher.

The simplest formula to calculate this variance is:

·         Variable Overhead Efficiency Variance = (the standard labor hours –the actual labor hours) x the standard variable overhead rate.
·         Variable Overhead Spending Variance = (the standard variable overhead rate – the actual variable overhead rate) x the actual allocation units.
Analysis of the terms:
Now, for your convenience to work easily on Overhead Variances Homework Answers let’s analyze these terms.
Point 1:
Variable overhead efficiency variance simply calculates the effectiveness of the production department to convert the input to output. Hence, the variance is positive when the standard or the budgeted labour hours is more the real hours used.
A positive value indicates the process of production was efficient and there was no loss or it was minimal. But if the real hours cross the standard or budgeted hours, the variance is negative and the variance then becomes adverse or unfavorable. This implies the production was not so efficient.
Point 2:
For variable spending overhead variance, you can get a positive value when the standard variable overhead rate is more than the actual variable overhead rate. The value is negative when the actual variable overhead rate is more than the standard or the budgeted value.
A positive value is always favorable in this case as well, whereas a negative value in adverse or unfavorable. Usually, in these cases also the production department is responsible. Most of the students have a problem in dealing with concepts associated with this concept of the subject. Hence, in such scenarios, manuals as these are of great help since they explain concepts in specific details.
In the next segment, now let’s discuss some actual examples.
·         Variable overhead efficiency variance problem

Total number of units produced 500
Standard Labor Hours / Unit 0.2
Actual Labor Hours 100
Standard variable overhead rate $8.50
Hence, the solution is –
Units Produced 500
 X Standard Labor Hours / Unit 0.3
Standard/ budgeted Labor Hours 150
Standard / Budgeted Hours 150
− Actual Labor Hours 100
Difference +50
× Standard variable overhead rate $8.5
Direct Labor Efficiency Variance +$425

Hence, the variance calculated here is positive and thus favorable. As discussed before as the Standard/ Budgeted hours were more than the actual hours, the variance was positive.
·         Variable Spending Overhead Variance
In this case, the actual labor hours were 120, the standard variable overhead rate was $8.5and the actual variable overhead rate was $7.8. Hence the Variable Spending Overhead Variable will be:

Standard Variable Overhead Rate $ 8.5
− Actual Variable Overhead Rate − $7.8
Difference Per Hour $ 0.7
× Actual Labor Hours 100
Variable Overhead Spending Variance $70

In this example, also the Variable Spending Overhead Variance is positive and hence is favorable. The reason behind this also will the standard rate being higher than the actual rate. Implying an efficient work by the production department.
Before attemptingoverhead variances homework answers, you should study these types of examples.
In general, there could be many reasons for favorable or adverse variance. It is important to know the reasons before attempting overhead variances homework answers.

Reasons for favorable variance:

  • Big Order Size – Large sized orders fetch more discounts taking the production cost down.
  • General Price decrease of the supplies also takes down the production cost.
  • Overall better cost control and the possible errors were calculated and planned efficiently beforehand.

   Reasons for adverse variance:

  • Increase in the minimum wage rate, nationwide. This directly incurs higher cost of labour.
  • Inefficient control of cost by the production department.
  • Error in planning. For example, not considering costs of per unit application of electricity during budgeting.

An adverse variance implies a higher level of actual manufacturing expense than the standard manufacturing cost.

The Importance:

One more thing that you should remember about Variance analysis is the importance of it, before attempting overhead variances homework answers.

Variance analysis helps to know the how different departments, divisions are performing related to the production. Like, the procurement department is directly responsible if there is a significant increase in the raw material purchase but the production department is directly responsible for the increase in the raw material use. Hence, their performances can be directly measured by variance analysis.

To conclude, to work on overhead variances homework answers properly, you should first clear your concepts and know the basic stuff before attempting the problem. These are not complicated concepts but certainly, needs understanding. You should also study practical case studies to learn these concepts better.

Variance analysis is one of the most basic and required concepts in cost accountancy. So, if you trying to become an expert on it, this is most necessary topic to study and understand. But you should also know that there are many more variances in cost accounting.