TOTAL OVERHEAD VARIANCE = Actual Factory Overhead - Standard Factory Overhead
Two Variance Method

under the two-variance method, the total variance is broken down into two variances - the controllable and volume variance.

Controllable Variance

The controllable variance is the difference between the total actual overhead incurred and the budget allowance based on standard hours for actual production. This variance is the responsibility of the producing department managers concened, covering only the costs over which they can exercise control. The controllable variance consists partly of the difference between actual and standard variable overhead costs and partly of the difference between the actual and budgeted fixed overhead. The formula to compute this variance is:


Actual Factory Overhead - Budgeted Allowance based on standard hours
(AFOH - BASH)
Volume Variance

The volume variance is the difference between the budgeted allowance based on standard hours and the total standard factory overhead. This variance is considered to be the responsibility of the excutive and departmental management and it indicates the costs of available capacity not utilized or not efficiently utilized during the period under consideration. The formula to compute this variance is as follows:


Budgeted allowance based on standard hours - Standard factory overhead
(BASH - (SH X SR))
Three Variance Method

With the three-variance method, the total overhead variance is analyzed into the spending or budget variance, the idle capacity (also called capacity or volume variance) and efficiency variance.


Spending Variance

This is the difference between the actual factory overhead incurred and the budget allowance based on actual hours used for actual production. Like the controllable variance, the spending variance is considered as the responsibility of the producing department cocerned, and is composed partly by the variable overhead costs variance and partly of the difference between actual nad budgeted fixed overhead. The spending or budget variance is computed using the following formula:


Actual Factory Overhead - Budgeted Allowance based on actual hour
(AFOH - BAAH)
Capacity Variance

Some accontants call iot simply as volume variance. This represents the difference between the budget allowance based on actual hours times the standard overhead rate. This is considered as the responsibility of the executive management, and indicates the amount of ] overhead that is etheir overabsorbed or under absorbed because the catual hour is more or less than te normal capacity in terms of hours. The formula to compute for the capacity variance is:


Budgeted Allowance based on Actual Hour - Actual Hour based on standard rate
(BAAH -(AH X SR))
Efficiency Variance

This variance indicates te diference between the actual hours worked and the standard hours allowed for actual production.This is caused by the efficiencies or inefficiencies in production. It is computed as follows:


Actual hour based on standard rate - Standard hour based on standard rateFour Variance Method

The four varaince metgod is a merely an expansion of the three-variance method. The four variances are spending, capacity, variable efficiency and fixed efficiency. The spending and capacity variances are exactly the same as the spending and the capacity variances of the three- variance method. The efficiency varaince of the three-variance method is merely broken down into variable efficiency and fixed efficiency, and computed by multiplying the difference between thw actual and the standard hours by the variableand fixed overhead rates. The formulas to be used follow:


Spending Variance = Actual Factory Overhead - Budegted Allowance based on Standard Hour
(AFOH - BAAH)
Capacity Variance = Budgeted Allowance based on Standard Hour - Actual Hour based on Standard rate
{BAAH - (AH X SR)}
Variable Efficiency Variance = Inefficiency (efficiency) hours x variable rate
{(AH - SH) X VR}
Fixed Efficiency Variance = Inefficiency (efficiency)hour x standard fixed overhead rate
{(AH - SH) X FR}