Variable overhead expenditure variance
Company E provides the following information relating to its variable overheads for
September. Overheads are absorbed on the basis of direct labour hours:

Question

Accepted Answer

The variable overhead expenditure variance for Company E is £30,000 (adverse).

Comment:
Firstly it is necessary to calculate the standard direct labour hour rate, which is the
rate at which variable overhead is incurred per standard direct labour hour. For
Company E, the standard direct labour hour rate is:

[latex]\frac{£200,000}{5,000} = £40[/latex] per standard direct labour hour

For every standard direct labour hour worked, £40 of variable overheads is incurred.
Secondly, this rate per standard direct labour hour must be applied to the actual
number of direct labour hours worked, and the answer compared to the actual variable
overheads in order to assess the level of variance:

	£
Actual variable overhead incurred	190,000
Actual hours at standard absorption rate (4,000 × £40)	160,000
Adverse expenditure variance	30,000

In other words, at the level of output actually achieved – 4,000 standard direct labour
hours – the variable overhead incurred should have been £160,000. In fact, £190,000
was incurred, resulting in an overspending of £30,000. If overheads are recovered
on a machine hour basis, then the calculation would be based on standard machine
hours, but the method of calculation remains the same.

Question 11.3[a]: Variable overhead expenditure variance Company E provides th...

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