Three-Variance Method of Computing Overhead Variances

The three-variance method collapses the variable and fixed overhead spending variances into a spending variance. It retains the efficiency and volume variances from the four-variance method.

Spending variance = Actual overhead - (Budgeted fixed overhead + (Actual direct labor hours Standard variable overhead rate))

Example: Adler Company budgeted the following amounts at the beginning of the year:

Units		150,000
Direct labor hours		15,000
Variable overhead		$30,000
Fixed overhead		$69,000

At the end of the year, Adler provided the following actual data:

Units		140,000
Direct labor hours		14,300
Variable overhead		$27,600
Fixed overhead		$70,000

Spending variance = ($27,600 + $70,000) - [$69,000 + (14,300 $2)] = 0

Note that the spending variance is the sum of the variable overhead spending variance and the fixed overhead spending variance. For Adler Company, the variable overhead spending variance is $1,000 Favorable and the fixed overhead spending variance is $1,000 Unfavorable, so the overall spending variance is indeed zero.

Efficiency variance = [Budgeted fixed overhead + (Actual direct labor hours Standard variable overhead rate)] - [Budgeted fixed overhead + (Standard direct labor hours Standard variable overhead rate)]

Efficiency variance = [$69,000 + (14,300 $2)] - [$69,000 + (14,000 $2)] = $600 Unfavorable

Notice that the efficiency variance computed under the three-variance method is the variable overhead efficiency variance.

Volume variance = [Budgeted fixed overhead + (Standard direct labor hours Standard variable overhead rate)] - (Standard direct labor hours Overhead rate)

Volume variance = $97,000 - 92,400 = $4,600 Unfavorable

Notice that the volume variance computed under the three-variance method is the fixed overhead volume variance.

Two-Variance Method of Computing Overhead Variances

The two-variance method of computing overhead variances collapses the four-variance method into a budget variance and a volume variance. The volume variance is the volume variance computed in the four-variance method. The budget variance, then, must be the sum of the variance overhead spending variance, the variable overhead efficiency variance, and the fixed overhead spending variance.

Budget variance = Actual overhead - [Budgeted fixed overhead + (Standard hours Variable overhead rate)]

Options to Drop Down.

Equal to or Not Equal to

Example: Adler Company budgeted the following amounts at the beginning of the year: Units 150,000 Direct labor hours 15,000 Variable overhead $30,000 Fixed overhead $69,000 At the end of the year, Adler provided the following actual data: Units 140,000 Direct labor hours 14,300 Variable overhead $27,600 Fixed overhead $70,000 Spending variance = ($27,600 + $70,000) - [569,000 + (14,300 x $2)) = 0 Note that the spending variance is the sum of the variable overhead spending variance and the fixed overhead spending variance. For Adler Company, the variable overhead spending variance is $1,000 Favorable and the fixed overhead spending variance is $1,000 Unfavorable, so the overall spending variance is indeed zero. Efficiency variance = (Budgeted fixed overhead + (Actual direct labor hours x Standard variable overhead rate)] - [Budgeted fixed overhead + (Standard direct labor hours x Standard variable overhead rate)] Efficiency variance = ($69,000 + (14,300 x $2)] - [S69,000 + (14,000 x sz)] = $600 Unfavorable Notice that the efficiency variance computed under the three-variance method is the variable overhead efficiency variance. Volume variance = (Budgeted fixed overhead + (Standard direct labor hours x Standard variable overhead rate)] - (Standard direct labor hours x Overhead rate) Volume variance = $97,000 - 92,400 = $4,600 Unfavorable Notice that the volume variance computed under the three-variance method is the fixed overhead volume variance. Two-Variance Method of Computing Overhead Variances The two-variance method of computing overhead variances collapses the four-variance method into a budget variance and a volume variance. The volume variance is the volume variance computed in the four- variance method. The budget variance, then, must be the sum of the variance overhead spending variance, the variable overhead efficiency variance, and the fixed overhead spending variance. Budget variance = Actual overhead - [Budgeted fixed overhead + (Standard hours x Variable overhead rate)]