Cost Accounting 101 Practice Test: Flexible Budgets, Overhead Cost Variances, and Management Control — Flashcards

Overhead cost variance is the difference between the actual and budgeted overhead costs allocated to products or services. It can indicate how well a company is managing its resources, controlling its costs, and pricing its products or services. 

Overhead cost variance is made up of four variances: Variable overhead rate variance, Variable overhead efficiency variance, Fixed overhead spending variance, and Volume variance. 
To calculate the overall overhead cost variance, subtract the standard overhead costs from the actual overhead costs. If the standard overhead cost is higher than the actual overhead cost, it's a favorable overhead variance. 

Overhead cost variance can be broken down into budget or spending variance and efficiency variance. 

Some causes of overhead variances include:
Fixed Overhead Expenditure Variance: Spending more money than budgeted
Fixed Overhead Volume Variance: Change in demand, interruption or stoppage of work due to defective planning, shortage of materials, absence of or faulty instructions, etc.

Related Test: Cost Accounting 101 Practice Test: Flexible Budgets, Direct-Cost Variances, and Management Control