2. Variable Overhead Cost Variance

✅ Explanation: The Variable Overhead Cost Variance measures the difference between the actual variable overhead costs and the budgeted (standard) variable overhead costs for a given level of production or activity. Unlike the overhead expenditure variance, which focuses on the rate of overhead, the variable overhead cost variance takes into account both the rate and the efficiency of applying variable overheads.

This variance looks specifically at variable overheads such as indirect materials, utilities, and wages that fluctuate with production levels. It can be broken down into:

• Variable Overhead Rate Variance: This measures the difference in the cost of variable overhead per unit of activity.

• Variable Overhead Efficiency Variance: This measures how efficiently the variable overhead was applied based on the actual level of activity compared to the expected level.

Formula for Variable Overhead Cost Variance:

$$\text{Variable Overhead Cost Variance}=(\text{Actual Variable Overhead }-\text{Standard Variable Overhead})$$

Where:

• Actual Variable Overhead: The actual cost incurred for variable overheads.

• Standard Variable Overhead: The expected cost based on standard rates for variable overhead.

It can also be broken down into two sub-variances:

1. Variable Overhead Spending (Rate) Variance:

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

   • This measures if the company spent more or less per unit of activity than expected.

2. Variable Overhead Efficiency Variance:

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

   • This measures whether the actual activity level (e.g., machine hours, labor hours) was more or less efficient in utilizing the overhead.

Example: If a company expected $2 per labor hour for electricity (standard variable overhead rate) and actually spent $2.50 per labor hour with 1,000 hours worked, the variable overhead cost variance would show how much more was spent due to the higher rate.