Illustration - Problem

A factory was budgeted to produce 2,000 units of output @ one unit per 10 hours productive time working for 25 days. 40,000 for variable overhead cost and 80,000 for fixed overhead cost were budgeted to be incurred during that period.

The factory worked for 26 days putting in 860 hours work every day and achieved an output of 2,050 units. The expenditure incurred as overheads was 49,200 towards variable overheads and 86,100 towards fixed overheads.

Working Table
Standard Actual Absorbed
Budgeted for AO for AI for AP
A B C
a) Output (units)
b) Days
c) Time (hrs)
1) Variable
2) Fixed
3) Total
2,000
25

40,000
80,000
1,20,000
2,050
26

49,200
86,100
1,35,300

The working table is populated with the information that can be obtained as it is from the problem data. The rest of the information that is present in a full fledged working table that we make use of in problem solving is filled below.

Formulae - Variable Overhead Absorption Variance ~ VOHABSV

Is the variable overhead cost absorbed different from the standard variable overhead cost for actual output?

The Variable Overhead Absorption Variance is the difference between the variable overhead absorbed and the standard variable overhead cost for actual output.

⇒ Variable Overhead Absorption Variance (VOHABSV)

 = AbC − SC(AO) Absorbed Cost − Standard Cost for actual output

In problem solving absorbed cost may be provided as a calculated figure. In such a case we do not get concerned about the rate of absorption unless specifically needed in some calculation.

Where the absorbed cost is not known we may have to calculate the cost. This calculation is based on the rate of absorption that has been used in the context to absorb total overheads.

• Absorption based on output

Absorbed Cost ~ AbC

 = AO × AbR/UO Or = SI(AO) × AbR/UI Or = SP(AO) × AbR/UP
• Absorption based on inputs

Absorbed Cost ~ AbC

 = AI × AbR/UI Or = SO(AI) × AbR/UO Or = SP(AI) × AbR/UP
• Absorption based on periods

Absorbed Cost ~ AbC

 = AP × AbR/UP Or = SO(AP) × AbR/UO Or = SI(AP) × AbR/UI

Standard Cost for Actual Output (Variable Overhead)

Standard Cost for Actual Output ~ SC(AO)

= BC ×
 AO BO
Or = AO × BR/UO
Or = SI(AO) × BR/UI
Or = SP(AO) × BR/UP

Formula in useful forms

VOHABSV = AbC − SC(AO)

Absorbed Cost − Standard Cost for Actual Output

Absorption based on output units

Or = AO × (AbR/UO − BR/UO)

Actual Output × Difference between Absorbed and Budgeted Rates per unit output

Or = SI(AO) × (AbR/UI − BR/UI)

Standard Input for Actual Output × Difference between Absorption Rate per unit input and Budgeted Rate per unit input

Or = SP(AO) × (AbR/UP − BR/UP)

Standard Periods for Actual Output × Difference between Absorption Rate per unit period and Budgeted Rate per unit period

None

None

Note

• AbR/UO, AbR/UI, AbR/UP in the above calculations pertains to variable overheads.
• Theoretically there are many possibilities. Only those that provide peculiar routes to solve problems are given as an academic exercise.
• Finding the costs by building up the working table and using the formula involving costs is the simplest way to find the VOHABSV.

Taking time for input and days for periods

 VOHABSV = AbC − SC(AO) Or = AO × [AbR/UO − BR/UO] Or = ST(AO) × [AbR/UT − BR/UT] Or = SD(AO) × [AbR/D − BR/D]

Solution - (Assuming absorption is based on Output)

No Absorption Variance

Where absorption is being done based on output units and absorption rate is the budgeted rate and the Variable Overhead Cost Variance is assumed to have been sub divided into two components, Efficiency Variance and Expenditure Variance, Variable Overhead Absorption Variance does not exist.

Absorption Variance is Zero

Where absorption is being done based on output units and absorption rate is the budgeted rate and the Variable Overhead Cost Variance is assumed to have been sub divided into three components, Absorption Variance, Efficiency Variance and Expenditure Variance, Variable Overhead Absorption Variance would be zero.
Standard Actual Absorbed
Budgeted for AO for AI for AP
A B C
I) Factor 1.025
a) Output (units)
b) Periods (Days)
c) Time (hrs)
1) Variable
2) Fixed
3) Total
e) Per Unit Output
1) Variable
2) Fixed
3) Total
(d1) ÷ (a)
(d2) ÷ (a)
(d3) ÷ (a)
2,000
25

40,000
80,000
1,20,000

20

41,000

2,050
26

49,200
86,100
1,35,300

41,000

=BR

In the absence of information to the contrary we assume

 AbR/UO(V) = BR/UO(V) = 20

Absorbed Variable Overhead Cost ~ AbC(V)

 = AO × AbR/UO(V) = 2,050 units × 20/unit = 41,000

 VOHABSV = AbC − SC(AO) = 41,000 − 41,000 = 0

Alternatives

 VOHABSV = AO × (AbR/UO − BR/UO) = 2,050 units × (20/unit − 20/unit) = 2,050 units × (0) = 0
• Calculations based on input

The absorbed overhead may be ascertained using SI(AO) and AbR/UI.
Standard Actual Absorbed
Budgeted for AO for AI for AP
A B C
I) Factor 1.025
a) Output (units)
b) Periods (Days)
c) Time (hrs)
1) Variable
2) Fixed
3) Total
e) Per Unit Output
1) Variable
2) Fixed
3) Total
(d1) ÷ (a)
(d2) ÷ (a)
(d3) ÷ (a)
f) Per Unit Input (hr)
1) Variable
2) Fixed
3) Total
(d1) ÷ (c)
(d2) ÷ (c)
(d3) ÷ (c)
2,000
25
20,000

40,000
80,000
1,20,000

20

2

20,500

41,000

2,050
26
22,360

49,200
86,100
1,35,300

41,000

=BR

=BR

One unit per 10 hours productive time

⇒ Budgeted Time per unit = 10 hours

Total Budgeted Time

 = Budgeted Output × Budgeted Time/unit = 2,000 units × 10 hrs/unit = 20,000 hrs

Total Actual Time

 = Number of Days × Actual Time/day = 26 days × 860 hrs/day = 22,360 hrs
SI(AO) = ST(AO)
= BT ×  AO BO
= 20,000 hrs × 1.025
= 20,500 hrs

In the absence of information to the contrary we assume

 AbR/UT(V) = BR/UT(V) = 2

Absorbed Variable Overhead Cost ~ AbC(V)

 = SI(AO) × AbR/UI(V) = ST(AO) × AbR/UT(V) = 20,500 hrs × 2/hr = 41,000

 VOHABSV = AbC − SC(AO) = 41,000 − 41,000 = 0 Or = SI(AO) × (AbR/UI − BR/UI) = ST(AO) × (AbR/UT − BR/UT) = 22,360 hrs × (2/hr − 2/hr) = 22,360 hrs × (0) = 0
• Calculations based on periods

The absorbed overhead may be ascertained using SP(AO) and AbR/UP.
Standard Actual Absorbed
Budgeted for AO for AI for AP
A B C
I) Factor 1.025
a) Output (units)
b) Periods (Days)
c) Time (hrs)
1) Variable
2) Fixed
3) Total
e) Per Unit Output
1) Variable
2) Fixed
3) Total
(d1) ÷ (a)
(d2) ÷ (a)
(d3) ÷ (a)
f) Per Unit Input (hr)
1) Variable
2) Fixed
3) Total
(d1) ÷ (c)
(d2) ÷ (c)
(d3) ÷ (c)
f) Per Unit Period (day)
1) Variable
2) Fixed
3) Total
(d1) ÷ (b)
(d2) ÷ (b)
(d3) ÷ (b)
2,000
25
20,000

40,000
80,000
1,20,000

20

2

1,600

25.625
20,500

41,000

2,050
26
22,360

49,200
86,100
1,35,300

41,000

=BR

=BR

=BR

SP(AO) = SD(AO)
= BD ×  AO BO
= 25 days × 1.025
= 25.625 days

In the absence of information to the contrary we assume

 AbR/D(V) = BR/D(V) = 1,600

Absorbed Variable Overhead Cost ~ AbC(V)

 = SP(AO) × AbR/UP(V) = SD(AO) × AbR/D(V) = 25.625 days × 1,600/day = 41,000

 VOHABSV = AbC − SC(AO) = 41,000 − 41,000 = 0 Or = SP(AO) × (AbR/UP − BR/UP) = SD(AO) × (AbR/D − BR/D) = 25.625 days × (1,600/day − 1,600/day) = 25.625 days × (0) = 0

Solution - (Assuming absorption is based on Input)

Standard Actual Absorbed
Budgeted for AO for AI for AP
A B C
I) Factor 1.025
a) Output (units)
b) Periods (Days)
c) Time (hrs)
1) Variable
2) Fixed
3) Total
e) Rate per Unit
1) Variable
2) Fixed
3) Total
(d1) ÷ (a)
(d2) ÷ (a)
(d3) ÷ (a)
f) Per Unit Input (hr)
1) Variable
2) Fixed
3) Total
(d1) ÷ (c)
(d2) ÷ (c)
(d3) ÷ (c)
2,000
25
20,000

40,000
80,000
1,20,000

2

41,000
2,050
26
22,360

49,200
86,100
1,35,300

44,720

=BR

One unit per 10 hours productive time

⇒ Budgeted Time per unit = 10 hours

Total Budgeted Time

 = Budgeted Output × Budgeted Time/unit = 2,000 units × 10 hrs/unit = 20,000 hrs

Total Actual Time

 = Number of Days × Actual Time/day = 26 days × 860 hrs/day = 22,360 hrs

In the absence of information to the contrary we assume

 AbR/UT(V) = BR/UT(V) = 2/hr

Absorbed Variable Overhead Cost ~ AbC(V)

 = AO × AbR/UT(V) = 22,360 hrs × 2/hr = 44,720
 AO BO
=
 2,050 units 2,000 units
= 1.025
SC(AO) = BC ×
 AO BO
= 40,000 × 1.025
= 41,000

 VOHABSV = AbC − SC(AO) = 44,720 − 41,000 = + 3,720 [Fav]

Alternatives

Where absorption is based on inputs, there are no formulae in alternate forms for finding the variable overhead absorption variance. The ones shown below are for finding the absorbed cost in an alternative manner.
• Calculations based on output

The absorbed overhead may be ascertained using SO(AI) and AbR/UO.
Standard Actual Absorbed
Budgeted for AO for AI for AP
A B C
I) Factor 1.025 1.118
a) Output (units)
b) Periods (Days)
c) Time (hrs)
1) Variable
2) Fixed
3) Total
e) Per Unit Output
1) Variable
2) Fixed
3) Total
(d1) ÷ (a)
(d2) ÷ (a)
(d3) ÷ (a)
f) Per Unit Input (hr)
1) Variable
2) Fixed
3) Total
(d1) ÷ (c)
(d2) ÷ (c)
(d3) ÷ (c)
2,000
25
20,000

40,000
80,000
1,20,000

20

2

41,000
2,236

2,050
26
22,360

49,200
86,100
1,35,300

44,720

=BR

=BR

(AI) = (AT)
=  AT BT
=  22,360 hrs 20,000 hrs
= 1.118
SO(AI) = SO(AT)
= BO ×  AT BT
= 2,000 units × 1.118
= 2,236 units

In the absence of information to the contrary we assume

 AbR/UO(V) = BR/UO(V) = 20

Absorbed Variable Overhead Cost ~ Abc(V)

 = SO(AI) × AbR/UO(V) = SO(AT) × AbR/UO(V) = 2,236 units × 20/unit = 44,720

 VOHABSV = AbC − SC(AO) = 44,720 − 41,000 = + 3,720 [Fav]
• Calculations based on periods

The absorbed overhead may be ascertained using SP(AI) and AbR/UP.
Standard Actual Absorbed
Budgeted for AO for AI for AP
A B C
I) Factor 1.025 1.118
a) Output (units)
b) Periods (Days)
c) Time (hrs)
1) Variable
2) Fixed
3) Total
e) Rate per Unit
1) Variable
2) Fixed
3) Total
(d1) ÷ (a)
(d2) ÷ (a)
(d3) ÷ (a)
f) Per Unit Input (hr)
1) Variable
2) Fixed
3) Total
(d1) ÷ (c)
(d2) ÷ (c)
(d3) ÷ (c)
g) Per Unit Period (day)
1) Variable
2) Fixed
3) Total
(d1) ÷ (b)
(d2) ÷ (b)
(d3) ÷ (b)
2,000
25
20,000

40,000
80,000
1,20,000

20

2

1,600

41,000
2,236

2,050
26
22,360

49,200
86,100
1,35,300

44,720

=BR

=BR

=BR

SP(AI) = SD(AT)
= BD ×  AT BT
= 25 days × 1.118
= 27.95 days

In the absence of information to the contrary we assume

 AbR/D(V) = BR/D(V) = 1,600

Absorbed Variable Overhead Cost ~ Abc(V)

 = SP(AO) × AbR/UP(V) = SD(AO) × AbR/D(V) = 27.95 days × 1,600/day = 44,720

 VOHABSV = AbC − SC(AO) = 44,720 − 41,000 = + 3,720 [Fav]

Solution - (Assuming absorption is based on Periods)

Standard Actual Absorbed
Budgeted for AO for AI for AP
A B C
I) Factor 1.025
a) Output (units)
b) Periods (Days)
c) Time (hrs)
1) Variable
2) Fixed
3) Total
e) Per Unit Output
1) Variable
2) Fixed
3) Total
(d1) ÷ (a)
(d2) ÷ (a)
(d3) ÷ (a)
f) Per Unit Input (hr)
1) Variable
2) Fixed
3) Total
(d1) ÷ (c)
(d2) ÷ (c)
(d3) ÷ (c)
g) Per Unit Period (day)
1) Variable
2) Fixed
3) Total
(d1) ÷ (b)
(d2) ÷ (b)
(d3) ÷ (b)
2,000
25

40,000
80,000
1,20,000

1,600

41,000
2,050
26

49,200
86,100
1,35,300

41,600

=BR

 AO BO
=
 2,050 units 2,000 units
= 1.025
SC(AO) = BC ×
 AO BO
= 40,000 × 1.025
= 41,000

In the absence of information to the contrary we assume

 AbR/D(V) = BR/D(V) = 1,600/day

Absorbed Variable Overhead Cost ~ AbC(V)

 = AD × AbR/D(V) = 26 days × 1,600/day = 41,600

 VOHABSV = AbC − SC(AO) = 41,600 − 41,000 = + 600 [Fav]

Alternatives

Where absorption is based on periods, days here, there are no formulae in alternate forms for finding the variable overhead absorption variance. The ones shown below are for finding the absorbed cost in an alternative manner.
• Calculations based on inputs

The absorbed overhead may be ascertained using SI(AP) and AbR/UI.
Standard Actual Absorbed
Budgeted for AO for AI for AP
A B C
I) Factor 1.025 1.04
a) Output (units)
b) Periods (Days)
c) Time (hrs)
1) Variable
2) Fixed
3) Total
e) Per Unit Output
1) Variable
2) Fixed
3) Total
(d1) ÷ (a)
(d2) ÷ (a)
(d3) ÷ (a)
f) Per Unit Input (hr)
1) Variable
2) Fixed
3) Total
(d1) ÷ (c)
(d2) ÷ (c)
(d3) ÷ (c)
g) Per Unit Period (day)
1) Variable
2) Fixed
3) Total
(d1) ÷ (b)
(d2) ÷ (b)
(d3) ÷ (b)
2,000
25
20,000

40,000
80,000
1,20,000

2

1,600

41,000

20,800
2,050
26
22,360

49,200
86,100
1,35,300

41,600

=BR

=BR

=  26 days 25 days
= 1.04

One unit per 10 hours productive time

⇒ Budgeted Time per unit = 10 hours

Total Budgeted Time

 = Budgeted Output × Budgeted Time/unit = 2,000 units × 10 hrs/unit = 20,000 hrs

Total Actual Time

 = Number of Days × Actual Time/day = 26 days × 860 hrs/day = 22,360 hrs
= 20,000 hrs × 1.04
= 20,800 hrs

In the absence of information to the contrary we assume

 AbR/UT(V) = BR/UT(V) = 2

Absorbed Variable Overhead Cost ~ Abc(V)

 = SI(AP) × AbR/UI(V) = ST(AD) × AbR/UT(V) = 20,800 hrs × 2/hr = 41,600

 VOHABSV = AbC − SC(AO) = 41,600 − 41,000 = + 600 [Fav]
• Calculations based on output

The absorbed overhead may be ascertained using SO(AP) and AbR/UO.
Standard Actual Absorbed
Budgeted for AO for AI for AP
A B C
I) Factor 1.025 1.04
a) Output (units)
b) Periods (Days)
c) Time (hrs)
1) Variable
2) Fixed
3) Total
e) Per Unit Output
1) Variable
2) Fixed
3) Total
(d1) ÷ (a)
(d2) ÷ (a)
(d3) ÷ (a)
f) Per Unit Input (hr)
1) Variable
2) Fixed
3) Total
(d1) ÷ (c)
(d2) ÷ (c)
(d3) ÷ (c)
g) Per Unit Period (day)
1) Variable
2) Fixed
3) Total
(d1) ÷ (b)
(d2) ÷ (b)
(d3) ÷ (b)
2,000
25
20,000

40,000
80,000
1,20,000

20

2

1,600

41,000
2,080

20,800
2,050
26
22,360

49,200
86,100
1,35,300

41,600

=BR

=BR

=BR

= 2,000 units × 1.04
= 2,080 units

In the absence of information to the contrary we assume

 AbR/UO(V) = BR/UO(V) = 20

Absorbed Variable Overhead Cost ~ Abc(V)

 = SO(AD) × AbR/UO(V) = 2,080 units × 20/unit = 41,600

 VOHABSV = AbC − SC(AO) = 41,600 − 41,000 = + 600 [Fav]

Variable Overhead Absorption Variance - Miscellaneous Aspects

• Nature of Variance

Based on the relations derived from the formulae for calculating VOHCV, we can identify the nature of Variance

• AbC ___ SC(AO)
• One that is relevant from these depending on the basis for absorption used

• AbR/UO ___ BR/UO
• AbR/UI ___ BR/UI
• AbR/UP ___ BR/UP

The variance would be

• zero when =
• Positive when >
• Negative when <
• Interpretation of the Variance

The following interpretations may be made

No Variance

Cost equal to the standard variable overhead cost for the actual output has been absorbed.

Favourable/Favorable

Cost greater than the standard variable overhead cost for the actual output has been absorbed.

Cost lesser than the standard variable overhead cost for the actual output has been absorbed.
• Who is answerable for the Variance?

Since the cost being absorbed is different from the standard cost for actual output, the ones who are responsible for fixing the basis and rate of absorption of overhead would be answerable for the variance.

Formulae using Inter-relationships among Variances

1. VOHABSV = VOHCV − VOHEFFV − VOHEXPV

Verification

The interrelationships between variances would also be useful in verifying whether our calculations are correct or not.
Basis of Absorption
Output Input
(Time)
Periods
(Days)
VOHABSV
+ VOHEFFV
+ VOHEXPV
0

+ 3,720

+ 600

a) VOHCV − 8,200 − 4,480 − 7,600
FOHCALV
+ FOHCAPV
+ FOHEFV

FOHVOLV
FOHEXPV

b) FOHCV
TOHCV (a) + (b) − 12,300 − 1,140 − 10,500

To enable understanding we have worked out the illustration under the three possible scenarios of overhead being absorbed on output, input and period basis.

Please be aware that only one of these methods would be in use.