What is a Variable Overhead Spending Variance
A variable overhead spending variance is the difference between the actual amount of variable overhead incurred and the amount that was budgeted. This variance can be either positive or negative, depending on whether spending was higher or lower than expected. A positive variance indicates that more variable overhead was incurred than was budgeted, while a negative variance indicates that less variable overhead was incurred than was budgeted.
Variable overhead spending variances are often caused by changes in the level of production, as well as by changes in the prices of materials and labor. Properly understanding and monitoring these variances can help managers to make better decisions about how to control costs.
How to calculate the Variable Overhead Spending Variance
To calculate the variance, simply take the difference between actual spending and budgeted spending, and then divide by the number of units produced. For example, if a company budgeted $100,000 for variable overhead costs and spent $120,000 on those costs, the variance would be $20,000. However, if the company produced 10,000 units during that time period, the variance would be $2 per unit. The Variable Overhead Spending Variance can help managers to understand where overspending is occurring and take steps to correct it. By monitoring this variance on a regular basis, companies can keep their overhead costs under control and improve their bottom line.
What factors can cause a Variable Overhead Spending Variance
This occurs when the amount of money spent on variable overhead costs deviates from the amount that was budgeted. There are several factors that can cause this to happen, including changes in production levels, raw materials prices, and labor rates. In some cases, a change in one of these factors can have a domino effect, leading to an increase in variable overhead costs. For example, if the price of raw materials goes up, this can lead to increased production costs, which in turn can lead to higher labor rates. As a result, it is important for businesses to closely monitor all of the factors that can affect their variable overhead costs.
How to reduce or eliminate a Variable Overhead Spending Variance
There are a few ways that you can work to reduce or eliminate a variable overhead spending variance. One way is to adjust your budget based on actual costs. This can help to ensure that you are not overspending in any one area. Another way to reduce the variance is to improve your forecasting methods. This will help you to more accurately predict future costs and ensure that your budget is realistic. Finally, you can also try to negotiate better prices with vendors. This can be a challenge, but it is often possible to get discounts on bulk purchases or by agreeing to long-term contracts. By taking these steps, you can work to significantly reduce your overhead spending variance.
The importance of monitoring a Variable Overhead Spending Variance
Monitoring a Variable Overhead Spending Variance is important for any organization in order to make necessary changes and improve conditions. The Variable Overhead Spending Variance is the difference in what was actually spent on variable overhead costs and what was budgeted to be spent. This number helps management assess if they are over or under spending in this area, which can then lead to changes in production methods, budgeting, and more.
Additionally, it can help to identify areas of wastefulness so that strategies can be put into place to correct the problem. By closely monitoring the Variable Overhead Spending Variance, organizations can make the necessary changes to save money and improve operations.
Tips for effectively managing a Variable Overhead Spending Variance
One way to effectively manage a Variable Overhead Spending Variance is to use a Standard Costing system. This system begins with setting standards for each overhead category, and then actual costs are compared to the standards. If the actual costs are less than the standards, then there is a favorable variance and no action needs to be taken. However, if the actual costs are greater than the standards, then there is an unfavorable variance and corrective action needs to be taken.
The corrective action may involve investigating the cause of the variance and then taking steps to reduce costs in that area. Additionally, the manager may need to adjust future budget estimates to account for the higher than expected costs. By using a Standard Costing system, managers can effectively keep track of overhead spending and take action when necessary to prevent an unfavorable variance.
How to use a Variable Overhead Spending Variance to your advantage
There are a few things that you need to keep in mind when you’re trying to use this number to your advantage. First, you need to understand what your company’s specific drivers are for variable overhead costs. This could be things like the price of raw materials or the amount of labor needed for production. Once you know what these drivers are, you can start to look for ways to reduce them. For example, if the price of raw materials is a big driver of your variable overhead costs, you might look for ways to get discounts from suppliers or find alternative suppliers who charge less. By understanding your company’s specific drivers and finding ways to reduce them, you can use your Variable Overhead Spending Variance to save money and improve your bottom line.