In standard costing, what are overhead variances and how do expenditure and volume variances differ?

In standard costing, what are overhead variances and how do expenditure and volume variances differ?

• A. Expenditure variance is the difference between actual and absorbed overhead.
• B. Overhead variances measure differences between actual and absorbed overhead; expenditure variance is difference in actual vs budgeted overhead; volume variance arises from difference between standard hours and actual output.
• C. Volume variance is the difference between actual and budgeted overhead.
• D. Overhead variances only concern fixed overhead.

Answer: (B)

Overhead variances in standard costing capture how actual overhead costs compare with what was allocated to production. They split into two parts: expenditure variance and volume variance. Expenditure variance is the difference between what actually happened with overhead costs and what the budget planned for overhead would cost in the period. It reflects the price and efficiency of using overhead resources relative to the budget. Volume variance arises from the level of activity—how much standard activity was achieved versus what was budgeted. It is calculated from the difference between the standard hours for actual output and the budgeted hours, multiplied by the standard overhead rate. If you produced more than planned (more hours), more overhead is absorbed than budgeted, which is typically favorable for fixed overhead; producing less leads to an adverse variance. Together, these two variances explain why actual overhead cost differs from overhead absorbed. The other statements don’t fit as well: expenditure variance is not simply actual versus absorbed; it’s actual versus budgeted. Volume variance is not just the difference between actual and budgeted overhead; it hinges on the activity level (standard hours for actual output vs budgeted hours). And overhead variances cover both fixed and variable components, not only fixed overhead.

Overhead variances in standard costing capture how actual overhead costs compare with what was allocated to production. They split into two parts: expenditure variance and volume variance. Expenditure variance is the difference between what actually happened with overhead costs and what the budget planned for overhead would cost in the period. It reflects the price and efficiency of using overhead resources relative to the budget. Volume variance arises from the level of activity—how much standard activity was achieved versus what was budgeted. It is calculated from the difference between the standard hours for actual output and the budgeted hours, multiplied by the standard overhead rate. If you produced more than planned (more hours), more overhead is absorbed than budgeted, which is typically favorable for fixed overhead; producing less leads to an adverse variance. Together, these two variances explain why actual overhead cost differs from overhead absorbed.

The other statements don’t fit as well: expenditure variance is not simply actual versus absorbed; it’s actual versus budgeted. Volume variance is not just the difference between actual and budgeted overhead; it hinges on the activity level (standard hours for actual output vs budgeted hours). And overhead variances cover both fixed and variable components, not only fixed overhead.