Overhead variances explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Overheads are a large part of a factory's cost, yet monthly reports often show them as a single total against budget. Overhead variances split the gap into causes: did we spend more than planned, did we run at a different volume, or did the machines work more slowly than standard? This guide shows how, for a plastics moulding unit.
Standard overhead rate = budgeted overhead ÷ budgeted base (hours or units). Overhead absorbed = standard hours for actual output × rate. Variable overhead: expenditure variance (spent against standard for the actual hours) and efficiency variance (hours taken against standard hours). Fixed overhead: expenditure variance (actual against budget) and volume variance (absorbed against budget), which splits into capacity (hours run against budgeted hours) and efficiency. Use them to separate spending problems from volume and productivity problems.
What it answers and the data needed
You need the overhead budget (variable per hour and fixed for the period), the budgeted hours, the standard hours per unit, the month's actual output, actual hours and actual overhead. The standard rate comes from the same method as the overhead absorption rate, applied to variable and fixed costs separately. Owners build such a report as part of cost reduction and profitability work.
The formulas
Sign: favourable (F) when actual is better than standard; adverse (A) when worse.
| Variance | Formula in words | Symbols |
|---|---|---|
| Variable overhead expenditure | Standard rate × actual hours − actual variable overhead | SR × AH − AVO |
| Variable overhead efficiency | (Standard hours for actual output − actual hours) × standard rate | (SH − AH) × SR |
| Variable overhead total | Standard variable overhead for actual output − actual | SH × SR − AVO |
| Fixed overhead expenditure | Budgeted fixed overhead − actual fixed overhead | BFO − AFO |
| Fixed overhead volume | Absorbed fixed overhead − budgeted fixed overhead | SH × SFR − BFO |
| Capacity (part of volume) | (Actual hours − budgeted hours) × fixed rate | (AH − BH) × SFR |
| Efficiency (part of volume) | (Standard hours for actual output − actual hours) × fixed rate | (SH − AH) × SFR |
| Fixed overhead total | Absorbed − actual | SH × SFR − AFO |
Volume variance = capacity + efficiency. Some firms also show a calendar variance for different working days; it is not needed here.
Worked example: a plastics moulding unit
All figures assumed. Standard time is 0.5 machine hour per unit.
- Budget for the month: 6,000 units = 3,000 hours. Variable overhead ₹10 an hour; fixed overhead ₹120,000.
- Standard fixed overhead rate = 120,000 ÷ 3,000 = ₹40 an hour.
- Actual: output 5,600 units; actual machine hours 3,100; actual variable overhead ₹31,800; actual fixed overhead ₹123,000.
- Standard hours for actual output = 5,600 × 0.5 = 2,800 hours.
Variable overhead
- Standard variable overhead for the output = 2,800 × 10 = 28,000.
- Expenditure = (10 × 3,100) − 31,800 = 31,000 − 31,800 = −800 (A).
- Efficiency = (2,800 − 3,100) × 10 = −3,000 (A).
- Total = 28,000 − 31,800 = −3,800 (A); check: −800 − 3,000.
Fixed overhead
- Absorbed = 2,800 × 40 = 112,000.
- Expenditure = 120,000 − 123,000 = −3,000 (A).
- Volume = 112,000 − 120,000 = −8,000 (A), made of:
- Capacity = (3,100 − 3,000) × 40 = +4,000 (F).
- Efficiency = (2,800 − 3,100) × 40 = −12,000 (A).
- Check: +4,000 − 12,000 = −8,000.
- Total = 112,000 − 123,000 = −11,000 (A); check: −3,000 − 8,000.
| Variance | ₹ | F or A |
|---|---|---|
| Variable overhead expenditure | 800 | A |
| Variable overhead efficiency | 3,000 | A |
| Fixed overhead expenditure | 3,000 | A |
| Fixed overhead capacity | 4,000 | F |
| Fixed overhead efficiency | 12,000 | A |
| Total overhead variance | 14,800 | A |
Check the total another way: overhead absorbed = 28,000 + 112,000 = 140,000; actual overhead = 31,800 + 123,000 = 154,800; difference 14,800 adverse. This difference is the under-absorption seen in the absorption guide, now split into causes.
What the owner decides. Most of the problem (₹15,000 of adverse efficiency across variable and fixed) comes from the machines taking 3,100 hours to make output that should have taken 2,800: scrap, slow cycles or setting problems. The machines ran 100 hours more than budget, which gives a favourable capacity variance of ₹4,000, but it does not offset the efficiency loss. Overspending is smaller: ₹800 on variable overhead for the hours worked and ₹3,000 on fixed overhead against budget. The first action is a review of cycle times and rejects on the moulding machines; the second, a check on what fixed costs went up by 3,000.
How to read the result
Fixed overhead per hour is an artefact of the budgeted hours: the volume variance does not mean cash was lost, but that the unit recovered less overhead than planned. Efficiency affects both variable and fixed variances, so add them together when judging the production team. Report variances by cost head to the manager of that head. Repeated adverse variances call for a look at the standard.
Common mistakes
- Treating fixed overhead per unit as if it were variable.
- Forgetting that efficiency appears under both variable and fixed overhead.
- Reporting volume variance to the production manager when the cause is a shortage of orders.
- Computing the variable overhead expenditure variance on standard hours instead of actual hours.
- Ignoring the sign convention.
The materials and labour side of the same analysis is in standard costing: material and labour variances; budgets that move with activity are in the guide on flexible budgets.
Need help with overhead control?
If your monthly report shows overhead as one figure against budget, we can help split it into variances by cause and cost head as part of a cost reduction and profitability review.
Key takeaways
- Variable overhead: expenditure and efficiency; fixed overhead: expenditure and volume.
- Fixed volume variance = capacity + efficiency.
- Total overhead variance equals actual overhead minus absorbed overhead (sign reversed).
- Efficiency shows in both variable and fixed variances.
- Fixed overhead rates depend on budgeted hours; interpret volume with care.
Read next
- Standard costing: material and labour variances
- Overhead absorption rates and the machine hour rate
- Flexible budget, zero-based budgeting and budget ratios
Disclaimer: The methods described are standard cost accounting and financial management techniques. The worked example uses an invented business and invented figures, including any tax, interest or exchange rate, which are assumptions for illustration and not current rates. Where the article refers to a legal requirement, the linked guide and the official text should be checked. This article is general information, not legal advice; check the official text before acting.