Remember that our overhead consists of fixed overhead and variable overhead. The variable overhead variance analysis formulas are very similar to the direct labor and direct materials variance analysis formulas. We’re still going to have a price variance and an efficiency variance.

For the price variance, we make an estimate as to how much one cost driver will cost us in variable overhead. A cost driver could include direct labor hours or machine hours.

For example, for every direct labor hour, we will incur $1.50 in variable overhead costs. But then let’s say that it ends up actually costing us $2 in variable overhead per direct labor hour. That means that we spent $0.50 more per direct labor hour of variable overhead.

Variable Overhead Price Variance Formula

Variable Overhead Price Variance = (Actual Variable Overhead Cost Per One Cost Driver – Standard Variable Overhead Cost Per One Cost Driver) X Actual Amount of Cost Driver Per Unit X Total Units Produced

We then multiply this variance of $0.50 by the actual number of direct labor hours per unit times the number of units. Let’s say it was actually 5 direct labor hours per unit and we made 100 units. Our unfavorable variance would be $250 ($0.50 X 5 X 100).

Now let’s shift over to our efficiency variance. The focus here is on the number of cost drivers per unit we produce. We will compare how many cost drivers we expected to use per unit versus how many we actually ended up using.

Variable Overhead Efficiency Variance Formula

Variable Overhead Efficiency Variance = (Actual Number of Cost Driver Per Unit – Estimated Number of Cost Driver Per Unit) X Standard Rate X Number of Units Produced Variable Overhead Efficiency Variance Formula Let’s talk through an example of this using direct labour hours as the cost driver. Let’s say we expected it to take 4 direct labour hours per unit, but it ended up taking 5 direct labour hours per unit. We used one more hour than expected (unfavourable variance).

We multiply the one-hour variance by our standard rate for variable overhead of $1.50 times the number of units that we produced of 100 units. Therefore, we have a $150 unfavourable variable overhead efficiency variance.