Variable Overhead Spending Variance
Candlefocus EditorVOSV is typically expressed in terms of machine hours or labor hours. The idea is that companies base their budgeted costs on expected levels of production. The standard or budgeted variable overhead rate is often expressed in terms of machine or production hours. If the actual costs come in lower than the budgeted costs, then the variance is favorable. However, if the actual expenses exceed the budgeted costs, then the variance is unfavorable.
In practice, understanding and measuring VOSV requires careful record-keeping and accurate forecasting. Companies should keep track of the standard metric they use to represent the level of production activity. This could be anything from labor hours to machine hours to direct cost. They then need to compare production activity with the actual practices that could result in an unfavorable VOSV.
For instance, if a company is basing its budget on machine hours, then its actual overhead costs need to be monitored and compared to the budgeted overhead costs for any particular machine. If the actual costs are higher than budgeted, then the variances should be analyzed to ensure it isn’t the result of inefficiencies. On the other hand, if the costs come in lower, then management can look for ways to reduce overhead costs and improve profitability.
Ultimately, variable overhead spending variance analysis is an important management tool for tracking and improving a company's financial performance. It allows companies to anticipate their overhead costs and react accordingly when costs exceed the budgeted amounts. By comparing the standard production metric to actual overhead costs, companies can identify and address any inefficiencies that result in increased overhead costs and improved the overall bottom line.