Overhead Controllable Variance

Controllable variance is the difference between the budget expense and the actual amount and it is under the company’s control as it has no correlation with the number of production units.

There are many types of variance that incur in the production operation. There is always a difference between the budget and the actual amount. It is very challenging to make the correct budget that is perfectly aligned with the actual amount.

The two most common types of variance are volume and rate variance.

Volume variances are the difference between the budgeted volume and the actual volume. For example, sales volume variance shows the different budgeted and actual sales quantity. It can happen due to many reasons. The price change will force the market to reduce the purchase. The competitors’ products also have an impact on our sale volume as well.

Rate Variance is the difference between the budget rate and the actual rate. It happens due to the market’s pressure, which is the market’s demand and supply. For example, when the supplier increase, we need to reduce the price to compete in the market.

The variance can be both favorable and unfavorable to the business. The budget expense can be lower than the actual amount, so it will increase the company’s profit. The actual sale volume can be higher than the budget, which is a good sign for the company as well.

On the other hand, the variance will be unfavorable if it goes against the above example. It will reduce the company’s profit. However, a huge favorable will be bad for the company as well. It means the company has made a less accurate budget which has impacted the whole business plan.

Overhead variance is the difference between budgeted overhead and actual overhead. The overhead is the cost of ongoing business operations. It is not related to the cost of production. The overhead can be fixed, variable, and both.

The management team is able to influence or control the controllable overhead. So it means that the variance is also under the control as well.

Controllable Overhead Variance Formula

Controllable Overhead Variance is the difference between the actual amount and the budgeted amount.

Controllable Overhead Variance = Budget overhead base on the standard hour – Actual Overhead

The budgeted overhead is calculated base on the standard hour which company expect to produce a unit of product. The management has an influence over the budget calculation.

Moreover, the actual overhead will be influence by the related department to ensure that the work has performed as effective as the budget.

Example of Controllable Overhead Variance

Company ABC is the manufacturer, during the month, they have produce products with the following detail:

Description Amount
Actual Overhead $ 30,000
Actual Hour Spend 3,000 hours
Actual unit produce 1,000 units
Standard hour for a unit 3 hours
Standard overhead rate (variable) $ 5/ h
Fixed Overhead 5,000
Normal labor hour 4,000

Budget overhead base on the standard hour = Fixed Overhead + Budgeted VC

= $ 5,000 + ( 1,000 units x 3 h x $ 5/h) = $ 20,000

Actual overhead is $ 30,000

Controllable overhead variance = $ 30,000 – $ 20,000 = $ 10,000 Unfavoriable