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Blueprint Problem: Standard Costing: Overhead Variances Four Variance Method of Computing Overhead Variances Overhead is the third category of manufacturing costs (Direct materials and direct labor are the other two.) subject to standard costing. We start with the overall overhead variance. Overhead is typically applied based on some driver - such as direct labor hours. Recall from Chapter 4 that: Applied overhead = Predetermined overhead rate x actual direct labor hours Overhead variance = Actual overhead - Applied overhead But, what does this overhead variance mean? Why did it occur? Over (under) spending? Over (under) production? More or less efficient use of overhead? Because overhead is a compilation of many types of costs - some variable and some fixed - it is more difficult to separate into price and quantity. As a result, a number of different techniques for figuring overhead variances have been developed. The most widely used methods of separating the overall overhead variance into component variances are the four-variance, three-variance and two-variance methods. These will be discussed in turn in this Blueprint exercise. The Four-Variance Method In the four-variance method, overhead costs are separated into fixed and variable amounts. The variable amount is applied based on a unit-based cost driver such as direct labor hours. The fixed costs are itemized and summed into total fixed overhead. Select the four variances with its appropriate definition. Definition Type of Variance Occurs when budgeted unit production is different from actual unit production. Fixed overhead volume variance Compares actual variable overhead cost with the variable overhead rate times actual direct labor hours. Variable overhead efficiency variance Compares actual with standard direct labor hours and multiplies the difference times the variable overhead rate. Fixed overhead spending variance Compares actual fixed overhead spending with budgeted fixed overhead spending. Variable overhead spending variance Similar to the price variances for direct materials and direct labor, the variable overhead spending variance is the difference between total actual variable overhead and the variable overhead rate times actual direct labor hours worked