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Overhead variance compares actual manufacturing overhead with the overhead applied to actual output. Separate variable spending, variable efficiency, fixed spending and fixed production volume effects, then reconcile the parts.
Overhead variance is actual manufacturing overhead minus the overhead applied to actual output under the chosen costing method. A useful standard-cost report separates spending, activity efficiency and fixed-cost absorption. Otherwise, a lower production volume can look like an increase in factory spending.
This article uses a standard-cost comparison with machine hours as the allocation base. Standard hours allowed are the hours the actual good output should require under the approved production standard. Applied overhead uses those allowed hours, rather than the hours actually consumed.
The OpenStax treatment of overhead variances distinguishes variable overhead spending and efficiency from fixed overhead spending and production volume. The distinctions matter because each comparison holds a different input constant.
Use actual minus standard throughout. Positive cost differences are unfavorable; negative cost differences are favorable. The general variance analysis guide covers this sign convention across other cost and revenue lines. Here the focus is the detailed overhead reconciliation.
Total overhead variance = Actual variable overhead + Actual fixed overhead − Applied variable overhead − Applied fixed overhead
Applied variable overhead = Standard hours allowed × Standard variable overhead rate
Applied fixed overhead = Standard hours allowed × Standard fixed overhead rate
An unfavorable total can include a spending problem, extra activity hours, lower absorption, or several of these at once. It does not establish the cause until the components are calculated.
Bring the plant's overhead ledger by account, the approved standard-rate file, the production completion summary and the machine-hour export. Each row needs a plant, period and compatible activity definition. Separate variable and fixed cost pools according to the approved cost behavior assumptions.
Reconcile actual overhead accounts to the ledger before splitting them. Exclude direct labor and direct materials already charged separately to production orders. Explain any centrally allocated costs, and use the same allocation scope in the budget and actual pool.
The standard file must preserve its effective date. A rate revised after the month closed is a different baseline, even if the new rate seems more realistic. Keep the original comparison available so the operational explanation remains reproducible.
A plant uses machine hours for September. All amounts below are supplied inputs except the explicitly calculated standard hours and fixed rate. Dollar results are exact; rates are shown to two decimal places.
| Input | Value | Basis |
|---|---|---|
| Actual good units completed | 4,500 | Production summary |
| Standard machine hours per good unit | 2.00 | Approved routing standard |
| Standard hours allowed | 9,000 | 4,500 × 2.00 |
| Actual machine hours | 9,200 | Activity export |
| Capacity denominator hours | 10,000 | Approved fixed-rate denominator |
| Standard variable rate (USD per hour) | 4.00 | Variable overhead standard |
| Budgeted fixed overhead (USD) | 60,000 | Approved monthly fixed pool |
| Standard fixed rate (USD per hour) | 6.00 | 60,000 / 10,000 |
| Actual variable overhead (USD) | 39,560 | Overhead ledger |
| Actual fixed overhead (USD) | 63,000 | Overhead ledger |
Applied variable overhead is 9,000 × $4.00 = $36,000. Applied fixed overhead is 9,000 × $6.00 = $54,000. Together, the output absorbs $90,000 against actual overhead of $102,560, leaving $12,560 unfavorable.
Let AH mean actual hours, SH mean standard hours allowed, SVR mean standard variable rate, and SFR mean standard fixed rate.
Variable spending variance = Actual variable overhead − AH × SVR
Variable efficiency variance = (AH − SH) × SVR
Fixed spending variance = Actual fixed overhead − Budgeted fixed overhead
Fixed production volume variance = Budgeted fixed overhead − SH × SFR
| Component | Calculation (USD) | Result (USD) | Direction |
|---|---|---|---|
| Variable spending | 39,560 − 9,200 × 4.00 | 2,760 | Unfavorable |
| Variable efficiency | (9,200 − 9,000) × 4.00 | 800 | Unfavorable |
| Fixed spending | 63,000 − 60,000 | 3,000 | Unfavorable |
| Fixed production volume | 60,000 − 9,000 × 6.00 | 6,000 | Unfavorable |
| Total | 2,760 + 800 + 3,000 + 6,000 | 12,560 | Unfavorable |
Actual variable spending per machine hour is 39,560 / 9,200 = $4.30, against $4.00 standard. The $0.30 difference across 9,200 hours explains $2,760. The additional 200 machine hours explain the separate $800 efficiency component.
Production volume is a different issue: allowed hours fall 1,000 below the capacity denominator. At $6.00 per hour, that leaves $6,000 of budgeted fixed overhead unabsorbed. The plant did not spend that amount again; it applied less of the fixed pool to output.
For a spreadsheet, put the inputs in named cells and use:
=Actual_VOH-Actual_hours*Standard_variable_rate
=(Actual_hours-Allowed_hours)*Standard_variable_rate
=Actual_FOH-Budget_FOH
=Budget_FOH-Allowed_hours*Standard_fixed_rate
The independent total is $102,560 − $90,000 = $12,560. Subtract that from the sum of the four component variances; the reconciliation must be zero. Also check variable components separately: $2,760 + $800 = $3,560, equal to $39,560 − $36,000. Fixed components give $3,000 + $6,000 = $9,000, equal to $63,000 − $54,000.
A spending comparison asks a narrower question. At actual hours, the flexible allowance is 9,200 × $4.00 + $60,000 = $96,800. Actual overhead exceeds it by $5,760: the $2,760 variable spending and $3,000 fixed spending components.
OpenStax's flexible-budget explanation describes adjusting variable costs for activity while keeping applicable fixed costs unchanged. The cost dashboard example shows the general spending comparison. Specify whether your activity measure is actual hours or output's allowed hours; those answer different questions when efficiency changes.
The controller owns account scope, standards and the reconciliation. Production confirms machine hours, accepted output and routing assumptions. Purchasing and plant management investigate utility prices, indirect supplies and other spending details. FP&A connects persistent differences to the next forecast.
Investigate evidence before assigning responsibility. Extra machine hours may reflect maintenance, rework or a changed product mix. A spending variance may reflect both prices and the composition of the overhead pool. Pair the efficiency result with quality and delivery measures before treating fewer hours as an improvement.
For another reconciliation of manufacturing balances, WIP variance compares recorded work in process with a declared standard for the work still unfinished.
Bring the overhead ledger, approved rates, activity export and production summary. Covirage maps the columns, and its tools compute and check the supplied cost comparisons; the external AI model explains the components with every figure traced to its rows. Create a free Covirage account and bring a sample of your own data.
See Covirage for industrial manufacturers for the supporting industry context.
Variable overhead spending variance compares actual overhead with the standard variable rate multiplied by actual activity hours. Efficiency variance compares actual hours with the standard hours allowed for actual output, valued at that same standard rate. One isolates spending per activity unit; the other isolates use of the activity base.
Fixed overhead is applied to output using a rate based on a declared capacity denominator. When output earns fewer standard hours than that denominator, applied fixed overhead falls below the budgeted fixed pool. That difference is an absorption effect even when actual fixed spending exactly matches budget.
Not necessarily. Fixed production volume variance reflects underabsorption relative to the capacity denominator, not additional cash spending. Some overhead also includes noncash costs. Read the spending components separately and reconcile the cost pool before treating the total variance as an avoidable payment.
The standard-cost example applies overhead using standard hours allowed for actual output. Actual hours are an intermediate comparison for variable spending and efficiency. A different costing system may use a different application basis, so state the method before borrowing formulas or comparing reported variances.