Accounting for Managers: Interpreting accounting information for decision-making

BUDGETARY CONTROL 237

Table 15.16 Overhead efficiency variance

Standard quantity 9 , 000 × 6

Standard price @ £5.00 270,000

Actual quantity 55,000

Standard price @ £5.00 275,000

Adverse efficiency variance −5,000

Table 15.17 Overhead spending variance

Actual quantity 55,000

Standard price @ £5 275,000

Actual quantity 55,000

Actual price @ £5.15 283,250

Adverse spending variance −8,250

Table 15.18 Total variable overhead variance

Efficiency – adverse −5,000

Spending – adverse −8,250

Total – adverse −13,250

The total variable overhead variance is an adverse £13,250, which is a combina-
tion of both efficiency and rate variances. The total variable overhead variance is
shown in Table 15.18.

Fixed cost variance

The fixed cost variance is straightforward. As changes in quantity cannot influence
fixed costs (which by definition are constant over different levels of production),
the variation must be the result of a spending variance.
In this case the variance is an adverse £5,000, because costs of £130,000 exceed
the budget cost of £125,000.

Reconciling the variances.................................

The difference between the original budget profit of £70,000 and the actual result
of £53,800 can now be reconciled, as in Table 15.19.
While the example used here is a manufacturing example, variance analysis
is equally applicable to service businesses, although there will, of course, be no