1. Overhead Expenditure Variance

✅ Explanation: Overhead Expenditure Variance (also known as Overhead Spending Variance) measures the difference between the actual overhead costs incurred and the expected (budgeted) overhead costs for a given level of activity. This variance specifically addresses the price or rate at which overhead costs are incurred and not the volume of activity or production.

• Overhead costs include both variable and fixed overhead items (e.g., utilities, indirect labor, factory rent, etc.).

• The expenditure variance can occur due to:

  • Higher or lower prices than expected for overhead items.

  • More or less spending on variable overheads, regardless of the production volume.

This variance can be split into:

• Variable Overhead Expenditure Variance (focused on variable overhead).

• Fixed Overhead Expenditure Variance (focused on fixed overhead).

Formula for Overhead Expenditure Variance:

$$\text{Overhead Expenditure Variance}=(\text{Actual Overhead Rate }-\text{Standard Overhead Rate})\times \text{Actual Activity Level}$$

• Actual Overhead Rate: The actual cost incurred for overhead (e.g., cost per machine hour, labor hour, etc.).

• Standard Overhead Rate: The expected cost for overhead as per the budget (based on standards set for cost per activity).

• Actual Activity Level: The actual level of activity (e.g., actual machine hours or labor hours used).

Example: If the company expected to pay $5 per machine hour for electricity (standard rate) but the actual cost was $6 per machine hour, and 1,000 machine hours were used, the overhead expenditure variance would show the extra cost incurred due to the higher rate.