overhead variances

Materials and labor are easy to picture: you can see the wood and watch the hours. Overhead is the harder bucket — the factory rent, the electricity, the supervisors' salaries, the machine maintenance — costs that keep the whole factory running but can't be traced to one product. Because overhead is applied to products using an estimated rate, the amount applied rarely matches the amount actually spent, and overhead variances explain that gap.

Overhead variances are usually trickier than materials and labor because overhead mixes variable costs (which rise with activity, like power) and fixed costs (which don't, like rent). At an introductory level they split into two: a controllable, or spending, variance — the difference between what was actually spent on overhead and what should have been spent at the actual activity level (the flexible-budget amount) — and a volume variance — which arises only for fixed overhead, because fixed overhead is applied per unit using a predetermined rate, so making fewer units than planned leaves some fixed overhead 'unabsorbed.' If you budgeted 10,000 of fixed overhead expecting 1,000 units (10 per unit) but made only 800, you applied just 8,000, leaving a 2,000 unfavorable volume variance.

Overhead variances matter for product costing and for understanding capacity use. The spending variance points to actual cost control of overhead items; the volume variance is really a measure of whether you used the capacity you planned for — an unfavorable volume variance usually means you ran below planned output, spreading fixed costs over fewer units. The crucial caveat is that the volume variance does not mean cash was wasted: fixed overhead like rent was going to be paid regardless. It is an accounting artifact of applying fixed costs per unit, not a sign that anyone overspent.