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Proper Interpretation of Variable Overhead Spending

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You recently were hired as an accountant for Northern Pacific Manufacturing. One of your responsibilities is to develop and maintain a standard costing system for overhead as well as materials and labor standard for the company.

During a recent planning meeting, the company's production manager expressed concern regarding the formulae for the spending and efficiency variances for variable overhead contained in your written proposal for the standard costing system. The production manager was unclear on what the proper interpretation of these two variances should be.

Required:
a. What is the proper interpretation of the variable overhead spending variance? What value does the variable overhead spending variance have to company management?

b. What is the proper interpretation of the variable overhead efficiency variance? Who in the company is responsible for control of the efficiency variance?

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Solution Summary

The solution examines the proper interpretation of variable overhead spending variance. The value that variable overhead spending variance have to company management is examined.

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ANSWERS

Required A
The variable overhead spending variance is the difference between the actual variable overhead cost and the budgeted variable overhead cost based on actual production volume. This variance shows the effect of changes in prices of inputs included in the variable overhead on actual production volume. For example, assuming that Northern Pacific Manufacturing produced 1,000 units of its product for the month and ...

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