Unlike material and labor variances, we cannot break into price and quantity components. We break overhead standards into variable and fixed instead.
A three column format is used. The variances are differences between the totals of each column.
Each column will contain two rowsone for variable and one for fixed amounts. Instead of multiplying down, we will add the amounts in each of the three columns. The total of the Actual column is compared to the total of the Flexible Budget column. The difference is labeled Overhead Controllable Variance. The total of the Flexible Budget column is compared to the total of Applied column and the difference is labeled as Overhead Volume Variance. In each comparison, if the left total exceeds the right total, the variance will be unfavorable. If the left total is less than the right total, the variance will be favorable.
To determine the total overhead variance, combine the overhead controllable variance with the overhead volume variance.
Overhead Rates
Recall that overhead costs are applied to products and services using a predetermined overhead rate (POHR). We will use two overhead rates for overhead variances so that it is easier to identify the cause of an overhead variance.
Applying Overhead
Instead of applying one rate as goods are produced, we apply each of the separate rates as each unit is produced.
Applied Overhead = [FOHR × Actual Units Produced]
+
[VOHR × Actual Units Produced
The VOH amount for the flexible budget column is the same as the variable overhead applied because both are based on actual activity and the rate is the same per unit. Recall that fixed costs are the same in total no matter how many units are produced. As a result, this fixed amount is the amount allowed no matter what level of units.
Causes of Overhead Variances
The controllable overhead variance exists because more or less overhead costs were incurred than the amount allowed. The volume variance exists because the volume level at which the company operated is different the amount budgeted.
Responsibility for Material Variances
Who is responsible for the overhead volume variance? No one in particular has caused this variance. The estimated units in the budget differs from the actual units.
Whose problem is it when an overhead controllable variance exists? The production supervisor is responsible for making sure that overhead costs are within budget guidelines, both fixed and variable.
Example Problem
Bateh Company produces hot sauce. It uses units as the cost driver for overhead. The following information was provided concerning its standard cost system for 2006:
Standard Data 
 Actual Data  
Material  1/8 lb. @ $7.50 per lb. 
 Produced  4,400  
Labor  24 mins. @ $12 per hr.  Materials purchased  600 lbs. for $4,440  
Budgeted fixed overhead  $28,350  Materials used  556 pounds  
Budgeted variable overhead  $4.50 per unit  Labor worked  1,610 hours totaling $19,481  
Budgeted production  4,500  Actual overhead  Fixed $20,000; Variable $28,400  
Solution
Set up the three column matrix and write the actual fixed and actual variable overhead costs on the respective lines under the Actual column. The problem gives these amounts as $28,400 and $20,000.
Actual 
 Flexible 
 Applied  
VOH  28,400  
FOH  20,000 
 

Let's look at the Applied column next. We need to determine the predetermined overhead rates for variable and fixed since neither are given. The formula to determine the variable overhead predetermined rate is:
Variable POHR = Estimated Variable Manufacturing Overhead ÷ Estimated Units
Fixed POHR = Estimated Fixed Manufacturing Overhead ÷ Estimated Units
The variable overhead rate is given at $4.50. If we wanted to know the total estimated variable overhead, we could work backwards using the 4,500 units and the rate and arrive at $19,800. For the fixed POHR, we are given the estimated overhead. The estimated, or budgeted units is 4,500. The fixed POHR is $6.30 per unit.
VOH rate =  $20,250  =  $ 4.50 
4,500  
FOH rate =  $28,350  =  6.30 
4,500  
Predetermined OH rate =  $10.80 
Applied Fixed Overhead = [FOHR × Actual Units Produced] = [$6.30 * 4,400] = $27,720
Applied Variable Overhead = [VOHR × Actual Units Produced] = [$4.50 * 4,400] = $19,800
These amounts go into the last column on the fixed and variable cost lines, respectively.
Actual 
 Flexible 
 Applied  
VOH  28,400 
 19,800  
FOH  20,000 


 27,720  

The flexible budget amount amount for variable is the same as the amount applied. This will always be the case when units are the activity. Because fixed costs are the same in total regardless of how many units are produced, the fixed overhead allowed in the flexible budge column is $28,350. After placing these amounts in the center column, we add each column and write the total below the underline for each of the four columns.
Actual 
 Flexible 
 Applied  
VOH  28,400  19,800  19,800 
 
FOH  20,000 
 28,350 
 27,720  
48,400  48,150  47,520 
Take the difference between the first and second columns to get the overhead controllable variance. Since the left total is greater than the right total, the variance is unfavorable. Take the difference between the middle and last columns to get the overhead volume variance. Since the left total is greater than the right total, the variance is unfavorable.
Actual 
 Flexible 
 Applied  
VOH  28,400  19,800  19,800 
 
FOH  20,000 
 28,350 
 27,720  
48,400  48,150  47,520  
OH Controllable  OH Volume  
$250 U 
 $630 U 

Total OH Variance  
$880 U 
The total variance is determined by combining the two overhead variances together. Because both variances are unfavorable, the two amounts are added creating a total unfavorable variance of $880.
Should the Overhead controllable and the overhead volume variances be investigated if the company has a 2% materiality threshold? You first need to calculate how much 2% is. The middle column is the total flexible budget amount allowed and is used as the budget amount for this calculation.
2% x $48,150 = $963
Because neither variance exceeds the $963 amount, neither should be investigated.
Who is responsible for these variances? The production supervisor is responsible for controllable overhead variable. Non one is responsible for the volume variance because we know why it exitsthe company operated at a different level of activity than budgeted. .