Impurity of variable factory overhead variances

Abstract

Variable factory overhead variances are often analyzed in the same manner as other variable costs variances, using direct labor hours as a surrogate activity measure. As a result, students tend to give the same interpretations to both direct labor variances and variable factory overhead variances. Using a simple example, this paper demonstrates that as conventionally analyzed a variable factory overhead spending variance may reflect not only price deviations, but also quantity deviations of which students must be aware if they are to fully understand overhead variance analysis.