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Cost Accounting · Standard Costing and Variance Analysis

Variable Overhead Variances: Formulas and Problems

Updated 10 October 2026 · Fact-checked

Variable overhead cost variance is the difference between standard variable overhead for actual output and actual variable overhead. It splits into an expenditure variance (rate) and an efficiency variance (hours). Compare actual hours at standard rate with actual cost for expenditure, and standard hours for actual output with actual hours for efficiency.

Understand Variable Overhead Variances

Variable overheads change with activity. Examples are power, consumables and lubricants. In standard costing, you fix a standard variable overhead rate per hour (or per unit) and a standard time for each unit of output.

At the end of the period you compare what the actual output should have cost with what was actually spent. The gap is the variable overhead cost variance. It is split into two parts so that management knows who is responsible.

The expenditure variance asks: did we pay more or less per hour than the standard rate? The efficiency variance asks: did we use more or fewer hours than the output allowed? Efficiency is valued at the standard rate, because the rate is not the issue here.

Because the overhead is variable, there is no volume variance, unlike fixed overheads. Where the question gives output instead of hours, the same logic works with units and a rate per unit. Also remember that overhead efficiency follows labour efficiency when the overhead is absorbed on direct labour hours.

Key rules to remember

Standard variable overhead for actual output
SVO = Standard hours for actual output × Standard rate per hour
Standard hours for actual output = actual units × standard hours per unit.
Variable overhead cost variance
VOCV = Standard variable overhead for actual output − Actual variable overhead
Positive means Favourable (F), negative means Adverse (A).
Variable overhead expenditure variance
VOEV = (Standard rate × Actual hours) − Actual variable overhead
Also written as (SR − AR) × Actual hours. Use hours actually worked, not paid.
Variable overhead efficiency variance
VOEffV = (Standard hours for actual output − Actual hours) × Standard rate
Fewer actual hours than standard gives Favourable.
Check
VOCV = VOEV + VOEffV
Use this to verify your answer.
Output basis (when rate is per unit)
Efficiency = (Actual units − Standard units for actual hours) × Standard overhead rate per unit
Use this only if the question gives a standard overhead rate per unit and the output expected from the actual hours worked. A higher actual output than standard gives Favourable.

How to solve Variable Overhead Variances questions

Follow the same layout for every question. It keeps the working visible for step marks.

  1. 1Write the standard data: standard hours per unit, standard variable overhead rate per hour, and actual output.
  2. 2Compute standard hours for actual output = actual units × standard hours per unit.
  3. 3Compute standard variable overhead for actual output = standard hours for actual output × standard rate.
  4. 4Note the actual hours worked and the actual variable overhead incurred. Find actual rate if needed.
  5. 5Compute expenditure variance = (standard rate × actual hours) − actual overhead. Mark F or A.
  6. 6Compute efficiency variance = (standard hours for actual output − actual hours) × standard rate. Mark F or A.
  7. 7Add the two and agree to the cost variance computed directly. Then write one line of interpretation.

Quickest way: Three-figure line method

When to use it: Use it in MCQs and in the first part of long numerical questions.

  1. Write three figures in a line: Standard hours for actual output × SR; Actual hours × SR; Actual cost.
  2. Subtract the second from the first to get efficiency. Subtract the third from the second to get expenditure.
  3. Subtract the third from the first to get the cost variance. A larger left figure means Favourable at each step.
  4. Verify that the two parts add up to the total.

Common mistakes in Variable Overhead Variances

  • Using hours paid instead of hours worked for expenditure variance.

    Idle time hours appear in labour questions and get mixed in.

    Fix: Variable overhead normally uses hours actually worked unless the question says otherwise. Check for idle time.

  • Valuing efficiency variance at the actual rate.

    Students copy the labour rate-variance habit.

    Fix: Efficiency variance is always at the standard rate.

  • Using standard hours for budgeted output instead of actual output.

    Budgeted figures are given first in the question.

    Fix: Flex the standard to actual output. Variable overhead depends on actual activity.

  • Wrong sign for Favourable and Adverse.

    The formula is reversed when actual cost is written first.

    Fix: Think in terms of cost: spending less than standard is Favourable, using more hours than standard is Adverse.

  • Adding a volume variance to the answer.

    Fixed overhead variances are studied right after and get mixed up.

    Fix: Variable overhead has only expenditure and efficiency variances.

Worked examples

Example 1

A company makes 2,000 units in a month. Standard: 3 labour hours per unit and variable overhead ₹5 per hour. Actual: 6,300 hours worked and variable overhead incurred ₹33,075. Calculate the variable overhead cost, expenditure and efficiency variances.

Show the solution
  1. Standard hours for actual output = 2,000 × 3 = 6,000 hours.
  2. Standard variable overhead = 6,000 × ₹5 = ₹30,000.
  3. Actual variable overhead = ₹33,075.
  4. Cost variance = 30,000 − 33,075 = ₹3,075 Adverse.
  5. Expenditure variance = (₹5 × 6,300) − 33,075 = 31,500 − 33,075 = ₹1,575 Adverse.
  6. Efficiency variance = (6,000 − 6,300) × ₹5 = ₹1,500 Adverse.
  7. Check: 1,575 + 1,500 = 3,075.

Answer: Cost variance ₹3,075 (A); expenditure variance ₹1,575 (A); efficiency variance ₹1,500 (A). Workers took 300 extra hours and the overhead cost more per hour than the standard of ₹5.

Example 2

Standard variable overhead rate is ₹8 per machine hour; each unit needs 4 machine hours. In a period 1,500 units were produced using 5,800 machine hours. Actual variable overhead was ₹44,080. Find the variances and comment.

Show the solution
  1. Standard hours for actual output = 1,500 × 4 = 6,000 hours.
  2. Standard variable overhead = 6,000 × ₹8 = ₹48,000.
  3. Cost variance = 48,000 − 44,080 = ₹3,920 Favourable.
  4. Expenditure variance = (₹8 × 5,800) − 44,080 = 46,400 − 44,080 = ₹2,320 Favourable.
  5. Efficiency variance = (6,000 − 5,800) × ₹8 = ₹1,600 Favourable.
  6. Check: 2,320 + 1,600 = 3,920.

Answer: Cost variance ₹3,920 (F); expenditure variance ₹2,320 (F); efficiency variance ₹1,600 (F). Machines ran 200 hours fewer than allowed and the actual rate (₹44,080 ÷ 5,800 = ₹7.60 per hour) was below the standard ₹8.

Exam tips

  • Always show standard hours for actual output as a separate line. Examiners give step marks for it.
  • Label every answer F or A and add a one-line reason. ICMAI expects interpretation.
  • Use the total check (expenditure + efficiency = cost) to catch errors before you move on.
  • In MCQs, look for whether the data gives actual hours worked or hours paid, and which rate base is used.
  • If the overhead rate is on machine hours, use machine hours throughout, not labour hours.

Practice questions from Standard Costing and Variance 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

Is there a volume variance for variable overheads?

No. Variable overheads move with activity, so the standard is flexed to actual output. Only expenditure and efficiency variances arise.

Why is efficiency variance valued at standard rate?

It measures the effect of using more or fewer hours, not a change in price. Using the standard rate keeps rate effects in the expenditure variance only.

What if the question gives only units and overhead per unit?

Use the per-unit standard for actual output as the standard cost. The cost variance is still standard minus actual. Split it only if hours data are given.

Does variable overhead efficiency variance equal labour efficiency variance?

In hours it is the same gap, since both use the same hours difference. In rupees they differ because the standard rates differ.