Management Accounting · Standard Costing and Variance Analysis (Management Accounting)

Variable Overhead Variances: Expenditure and Efficiency Formulas

Updated 10 October 2026 · Fact-checked

Variable overhead variances compare actual variable overhead with the standard variable overhead for actual output. Total variance = standard overhead for actual output − actual overhead. It splits into expenditure variance (rate) and efficiency variance (hours). Favourable means actual cost is lower than standard; adverse means higher.

Understand Variable Overhead Variances

Variable overheads change with activity. Examples are power, lubricants, consumable stores and indirect supplies. In standard costing you set a standard variable overhead rate per hour, usually per standard labour hour or machine hour, and a standard number of hours for each unit.

At the end of the period you compare what you should have spent for the output you actually made with what you actually spent. The gap is the variable overhead cost variance. A single number does not tell management what went wrong, so you split it into two causes.

The first cause is price: did you pay more or less per hour of activity than the standard rate? This is the variable overhead expenditure variance. The second cause is usage: did you take more or fewer hours than the standard allowed for the actual output? This is the variable overhead efficiency variance.

The efficiency variance works like the labour efficiency variance, but valued at the standard variable overhead rate. Because variable overhead moves with hours, an inefficient use of hours also wastes variable overhead. Note that the variable overhead has no volume variance. Volume only matters for fixed overhead, because variable overhead is already flexed to actual output.

In this guide, the base is hours, either labour hours or machine hours, as the question states. Use whichever base the question gives for the standard rate.

Key rules to remember

Standard variable overhead rate: SR = Budgeted variable overhead ÷ Budgeted hours (or standard rate per hour given); Rate per labour hour or machine hour, as the question states.
Standard hours for actual output (SH): SH = Actual output × Standard hours per unit; This is the flexing step. It is the hours allowed for what you actually produced.
Standard variable overhead for actual output: SH × SR; What the output should have absorbed.
Variable overhead cost variance: (SH × SR) − Actual variable overhead; Positive is favourable. Negative is adverse.
Variable overhead expenditure variance: (AH × SR) − Actual variable overhead; AH is actual hours worked. Also written as AH × (SR − AR), where AR is actual rate per hour.
Variable overhead efficiency variance: (SH − AH) × SR; Favourable if actual hours are less than standard hours.
Check: Cost variance = Expenditure variance + Efficiency variance; Use this to verify your answer. The signs must agree.

How to solve Variable Overhead Variances questions

Use this order for any question. It keeps the signs correct and gives step marks.

1Write the data: actual output, actual hours, actual variable overhead, standard hours per unit and standard rate per hour.
2Find the standard rate per hour. If budgeted overhead and budgeted hours are given, divide them.
3Calculate standard hours for actual output: actual units × standard hours per unit.
4Calculate standard variable overhead for actual output: SH × SR.
5Calculate expenditure variance: (AH × SR) − actual overhead. Mark it F or A.
6Calculate efficiency variance: (SH − AH) × SR. Mark it F or A.
7Add the two and check that the total equals the cost variance (SH × SR − actual overhead).
8Add one line of interpretation, such as high power cost or idle machine time.

Quickest way: Three-line variance layout

When to use it: Use when you have little time and the question gives hours and costs clearly.

Write three figures in a row: SH × SR, AH × SR, Actual cost.
Expenditure variance = middle figure − actual cost.
Efficiency variance = first figure − middle figure.
Cost variance = first figure − actual cost. A higher left value gives favourable variances.
Label each F or A before moving on.

Common mistakes in Variable Overhead Variances

Using actual output hours instead of standard hours for actual output in the efficiency variance.
Students forget to flex the standard to actual units produced.
Fix: Always compute SH = actual units × standard hours per unit first.
Calculating the standard rate using actual hours or actual overhead.
Several figures look similar in the question.
Fix: Standard rate comes only from budgeted overhead ÷ budgeted hours, or is given directly.
Reversing the sign convention, for example writing (AH − SH) × SR as favourable.
Formulas are memorised without logic.
Fix: Fewer actual hours than standard is favourable. Spending less than the standard is favourable.
Adding a volume variance for variable overhead.
Students copy the fixed overhead pattern.
Fix: Variable overhead has only expenditure and efficiency variances, because the standard is already flexed.
Not checking that the two variances sum to the cost variance.
Time pressure.
Fix: Always do the 10-second check. A mismatch means an arithmetic or sign error.

Worked examples

Example 1

A company budgets 4,000 machine hours and variable overhead of ₹2,00,000 for the month. Standard time is 2 hours per unit. In the month, 1,900 units were produced, 3,900 machine hours were worked and actual variable overhead was ₹2,03,000. Calculate the variable overhead cost, expenditure and efficiency variances.

Show the solution

Standard rate = ₹2,00,000 ÷ 4,000 = ₹50 per hour.
Standard hours for actual output = 1,900 × 2 = 3,800 hours.
Standard overhead for actual output = 3,800 × ₹50 = ₹1,90,000.
Overhead at actual hours and standard rate = 3,900 × ₹50 = ₹1,95,000.
Cost variance = ₹1,90,000 − ₹2,03,000 = ₹13,000 Adverse.
Expenditure variance = ₹1,95,000 − ₹2,03,000 = ₹8,000 Adverse.
Efficiency variance = (3,800 − 3,900) × ₹50 = ₹5,000 Adverse.
Check: ₹8,000 + ₹5,000 = ₹13,000 Adverse.

Answer: Cost variance ₹13,000 (A); expenditure variance ₹8,000 (A); efficiency variance ₹5,000 (A). Spending per hour was above standard, and more hours were used than allowed.

Example 2

Standard variable overhead is ₹6 per labour hour, and each unit needs 5 labour hours. In a period, 600 units were produced. Actual labour hours worked were 2,900 and actual variable overhead was ₹16,820. Calculate the variable overhead variances.

Show the solution

Standard hours for actual output = 600 × 5 = 3,000 hours.
Standard overhead for actual output = 3,000 × ₹6 = ₹18,000.
Overhead at actual hours and standard rate = 2,900 × ₹6 = ₹17,400.
Cost variance = ₹18,000 − ₹16,820 = ₹1,180 Favourable.
Expenditure variance = ₹17,400 − ₹16,820 = ₹580 Favourable.
Efficiency variance = (3,000 − 2,900) × ₹6 = ₹600 Favourable.
Check: ₹580 + ₹600 = ₹1,180 Favourable.

Answer: Cost variance ₹1,180 (F); expenditure variance ₹580 (F); efficiency variance ₹600 (F). The actual rate was ₹16,820 ÷ 2,900 = ₹5.80 per hour, below the standard ₹6.

Exam tips

Always show standard hours for actual output as a separate line. Markers look for it.
Label every variance F or A and add a one-line reason. ICMAI expects interpretation.
In MCQs, the efficiency variance is the quickest: (SH − AH) × SR. Watch for given data that is a distraction.
If a question gives idle time or machine hours, check which base the standard rate uses before computing.
Use the check that expenditure plus efficiency equals the cost variance, even in MCQs where you have spare seconds.

Practice questions from Standard Costing and Variance Analysis (Management Accounting)

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 are the variable overhead variances in CMA Inter?

There are three: cost variance, expenditure variance and efficiency variance. The cost variance is the total of the other two. There is no volume variance for variable overhead.

How is variable overhead efficiency variance different from labour efficiency variance?

Both use the difference between standard hours and actual hours. Labour efficiency is valued at the standard wage rate, while variable overhead efficiency is valued at the standard variable overhead rate.

Why is there no volume variance for variable overhead?

Variable overhead changes with activity, so the standard is already flexed to actual output. Nothing is left over due to under or over production, unlike fixed overhead.

Can the expenditure variance be favourable while efficiency is adverse?

Yes. You may pay less per hour than the standard rate but use more hours than allowed. The two variances are independent, and the cost variance shows the net effect.