Management Accounting · Variance calculations and analysis

Variable Overhead Variances: Expenditure and Efficiency

Updated 11 October 2026 · Fact-checked

Variable overhead variances compare actual variable overhead cost with the standard cost of the output achieved. The expenditure variance compares actual cost with actual hours at the standard rate. The efficiency variance values the difference between standard hours for actual output and actual hours worked, at the standard rate per hour.

Understand Variable Overhead Variances

A standard cost card gives each unit a standard number of labour hours and a standard variable overhead cost per hour. Variable overheads, such as power or indirect supplies, rise and fall with activity. In this syllabus the activity is hours worked.

At the end of a period you know the actual output, the actual hours worked and the actual variable overhead cost. You compare these with what the standard says they should have been. The total difference is the total variable overhead variance. It splits into two parts so management can see the cause.

The variable overhead expenditure variance asks: did we pay more or less per hour than the standard rate? It is the price-type variance. The variable overhead efficiency variance asks: did we use more or fewer hours than the standard allows for the output made? It is the usage-type variance.

The efficiency variance works exactly like the labour efficiency variance, except it uses the variable overhead rate per hour instead of the labour rate. If labour is inefficient, variable overhead is also adversely affected, because overhead is assumed to be driven by hours. So the two efficiency variances usually have the same sign.

In the exam you label each variance as favourable (F) or adverse (A). A variance is adverse if it makes profit lower than standard. A variance is favourable if it makes profit higher than standard.

Key formulas to remember

Variable overhead expenditure variance: (Actual hours × standard rate per hour) − actual variable overhead cost; Positive result = favourable (actual cost is lower). Negative = adverse. Use the hours that actually drive the overhead, normally actual hours worked.
Variable overhead efficiency variance: (Standard hours for actual output − actual hours) × standard variable overhead rate per hour; Positive = favourable (fewer hours used than allowed). Negative = adverse.
Standard hours for actual output: Actual units produced × standard hours per unit; Always based on actual output, not budgeted output.
Total variable overhead variance: (Actual output × standard variable overhead cost per unit) − actual variable overhead cost; Equals the expenditure variance plus the efficiency variance. Use it as a check.

How to solve Variable Overhead Variances questions

Use the same short routine for every question. It keeps the signs right and gives you a built-in check.

1Write down the actual output, actual hours worked, actual variable overhead cost and the standard data (hours per unit and rate per hour).
2Calculate the standard hours for actual output: actual units × standard hours per unit.
3Calculate the expenditure variance: actual hours × standard rate, minus actual cost.
4Calculate the efficiency variance: standard hours for actual output minus actual hours, multiplied by the standard rate.
5Label each answer F or A. Positive in these formulas means favourable; negative means adverse.
6Check: the two variances added together should equal the total variance (standard cost of actual output minus actual cost).
7Read the question again to see what is asked, such as one variance, its sign, or its value to the nearest whole number.

Quickest way: Three-line rate-and-hours table

When to use it: Use this for number entry or multiple choice questions when you have about two minutes per question.

Line 1: actual hours × standard rate. Compare with actual cost to get the expenditure variance.
Line 2: standard hours for actual output × standard rate. Compare with line 1 to get the efficiency variance.
Add the two to get the total variance, then pick the answer that matches both value and F or A.
For the efficiency variance, you do not need the actual cost at all. Ignore it to save time and avoid errors.

Common mistakes in Variable Overhead Variances

Using budgeted hours or budgeted output to find standard hours.
The budget figures are often given in the question and look relevant.
Fix: Always multiply actual units produced by standard hours per unit. Variances use flexed, actual-output standards.
Using the actual overhead rate in the efficiency variance.
Students mix up the efficiency variance with the expenditure variance.
Fix: Efficiency is a hours difference valued at the standard rate. The actual rate belongs only in the expenditure variance, through actual cost.
Getting the sign wrong.
Students subtract in the wrong order and then guess F or A.
Fix: Use the formulas as written: what it should have been minus what it was. Positive is favourable and negative is adverse.
Using hours paid instead of hours worked when idle time exists.
Labour questions use hours paid, so students carry that over.
Fix: For variable overhead based on hours worked, use hours actually worked. Idle hours do not drive the overhead unless the question says otherwise.
Thinking an adverse labour efficiency variance means the overhead efficiency variance is favourable.
Students treat each variance separately.
Fix: Both use the same hours difference, so they have the same sign. If you get opposite signs, recheck your work.

Worked examples

Example 1

A company makes 2,000 units. Each unit has a standard of 3 labour hours and a standard variable overhead rate of $4 per hour. Actual hours worked were 6,300 and actual variable overhead cost was $24,150. Calculate the variable overhead expenditure and efficiency variances.

Show the solution

Standard hours for actual output = 2,000 × 3 = 6,000 hours.
Expenditure: actual hours × standard rate = 6,300 × $4 = $25,200.
Expenditure variance = $25,200 − $24,150 = $1,050 favourable.
Efficiency: (6,000 − 6,300) × $4 = −300 × $4 = −$1,200, so $1,200 adverse.
Check: total variance = (6,000 × $4) − $24,150 = $24,000 − $24,150 = $150 adverse. Also $1,050 F − $1,200 A = $150 A. This agrees.

Answer: Expenditure variance $1,050 favourable; efficiency variance $1,200 adverse; total $150 adverse.

Example 2

A product has a standard of 2.5 hours per unit and a standard variable overhead cost of $6 per hour. In March, 1,400 units were made using 3,400 hours. Actual variable overhead cost was $21,080. Which is correct? A) Expenditure $680 adverse, efficiency $600 favourable. B) Expenditure $680 favourable, efficiency $600 favourable. C) Expenditure $680 adverse, efficiency $600 adverse. D) Expenditure $600 favourable, efficiency $680 adverse.

Show the solution

Standard hours for actual output = 1,400 × 2.5 = 3,500 hours.
Expenditure: 3,400 × $6 = $20,400. Actual cost is $21,080, which is higher, so the variance is $680 adverse.
Efficiency: (3,500 − 3,400) × $6 = 100 × $6 = $600 favourable, as fewer hours were used than allowed.
Check: total = (3,500 × $6) − $21,080 = $21,000 − $21,080 = $80 adverse. Also $600 F − $680 A = $80 A. This agrees.

Answer: A) Expenditure $680 adverse, efficiency $600 favourable.

Exam tips

In number entry questions, check whether the question asks for the value only or the value with F or A, and enter the answer in the format requested.
Work the efficiency variance first when actual cost is not given or is awkward. It needs only hours and the standard rate.
In multiple choice questions the wrong options often have the right numbers with the wrong sign. Decide F or A before you pick.
Compare variable overhead and labour efficiency variances in Section B. They have the same sign, so explain them with the same cause, such as inexperienced staff or poor materials.
Use the total variance as a quick check. It takes ten seconds and catches most slips.

Practice questions from Variance calculations and analysis

Variable Overhead Variances in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Variable Overhead Variances: frequently asked questions

What is the variable overhead efficiency variance?

It measures the cost of using more or fewer hours than the standard allows for the actual output. You multiply the hours difference by the standard variable overhead rate per hour. Fewer hours than standard gives a favourable variance.

Why does variable overhead efficiency use the standard rate, not the actual rate?

Efficiency is about quantity, which is the hours used. Valuing hours at the standard rate keeps price effects out. Price effects appear in the expenditure variance.

How is the variable overhead expenditure variance different from the labour rate variance?

Both are price-type variances. The labour rate variance compares the actual wage paid with the standard for hours paid. The variable overhead expenditure variance compares actual overhead cost with the standard rate multiplied by actual hours worked.

Can the two variable overhead variances have opposite signs?

Yes. The expenditure variance can be adverse while the efficiency variance is favourable, as in the second worked example. This happens because they measure different things: the rate paid and the hours used.