What is Standard Variable Overhead Cost?
Definition
Standard Variable Overhead Cost is an estimated expense associated with manufacturing a product or executing an operational task, taking into account the variable overhead that changes in direct relation to the production volume. It is calculated using the standard time required to complete the task or produce the product and the standard variable overhead absorption rate per unit of that time.
Key Concepts
- Standard Time: The estimated amount of time allowed to perform an operation or produce a product.
- Standard Variable Overhead Absorption Rate: The predetermined rate at which variable overhead costs are absorbed or allocated based on standard time units.
- Variable Overhead: Expenses that change proportionately with the level of production activity, such as utilities, indirect materials, and maintenance costs.
Examples
-
Manufacturing Scenario:
- Suppose a factory estimates that producing a table should take 2 hours of labor.
- The standard variable overhead absorption rate is calculated at $10 per hour.
- The standard variable overhead cost for producing one table would be 2 hours x $10/hour = $20.
-
Service Industry Scenario:
- A software development company estimates that each project requires 100 hours of development time.
- The standard variable overhead absorption rate for operational costs like utilities and software maintenance is $5 per hour.
- The standard variable overhead cost for a project would be 100 hours x $5/hour = $500.
Frequently Asked Questions
What is the purpose of standard variable overhead cost?
The purpose is to provide a consistent measure for budgeting and performance evaluation. It helps businesses in cost control by setting benchmarks for expected expenses.
How is the standard variable overhead absorption rate determined?
This rate is calculated by estimating the total variable overheads for a period and dividing it by the total standard labor hours or machine hours expected to be used.
What factors can affect the standard variable overhead cost?
Factors include changes in production efficiency, fluctuations in utility costs, and variations in indirect materials prices.
What is the difference between fixed and variable overhead costs?
Fixed overhead costs remain constant regardless of production levels (e.g., rent, salaries), while variable overhead costs fluctuate with production volume (e.g., utilities, maintenance).
How can businesses use standard variable overhead costs in variance analysis?
Businesses compare actual variable overhead costs to standard costs to identify variances, analyze reasons behind them, and take corrective actions to improve efficiency and control costs.
Related Terms
- Standard Cost: The estimated cost to produce a single unit of product, including materials, labor, and overhead.
- Overhead Absorption Rate: The rate at which overhead costs are allocated to the products or activities based on specific metrics such as labor hours or machine hours.
- Cost Variance: The difference between the actual cost and the standard or expected cost.
Online Resources
- Investopedia: Standard Costing and Variance Analysis
- Accounting Tools: Understanding Overhead Rates
- The Balance: Differences Between Fixed and Variable Costs
Suggested Books for Further Study
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan - Offers in-depth knowledge of cost accounting principles, including standard costing and overhead allocation.
- “Management and Cost Accounting” by Alnoor Bhimani, Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan - Explores comprehensive strategies and tools for managerial accounting.
- “Accounting for Decision Making and Control” by Jerold Zimmerman - Provides insights into managerial accounting designed for effective decision-making.
Accounting Basics: “Standard Variable Overhead Cost” Fundamentals Quiz
### What is a standard variable overhead cost?
- [ ] A fixed cost determined annually.
- [ ] The total cost of producing a product.
- [x] An estimated expense based on standard time and overhead absorption rate.
- [ ] The actual expense incurred during production.
> **Explanation:** A standard variable overhead cost is an estimated expense derived from the standard time allowed for producing a product and the standard variable overhead absorption rate per unit of time for production.
### Which of the following best defines variable overhead cost?
- [ ] Costs that do not change with production volume.
- [ ] Direct material costs.
- [x] Costs that fluctuate with the level of production activity.
- [ ] Salaries of permanent staff.
> **Explanation:** Variable overhead costs are those expenses that change in direct relation to the production volume, such as utilities and indirect materials.
### Standard time refers to?
- [ ] The actual time taken to complete a task.
- [x] The estimated time required to perform an operation or produce a product.
- [ ] Time taken to complete all operational tasks.
- [ ] The time during which the overhead is calculated.
> **Explanation:** Standard time refers to the pre-determined estimated time required to perform an operation or produce a product.
### How do businesses benefit from standard variable overhead costs?
- [ ] By overestimating operational expenses.
- [x] By setting benchmarks for budgeting and evaluating performance.
- [ ] By eliminating all overhead costs.
- [ ] By increasing production time.
> **Explanation:** Businesses benefit from standard variable overhead costs by setting benchmarks for expected expenses, which aids in budgeting and performance evaluation.
### What is an overhead absorption rate?
- [ ] The rate at which product quality is tested.
- [x] A pre-determined rate at which overhead costs are allocated to products or activities.
- [ ] The rate at which employees are paid.
- [ ] The absorption rate of raw materials.
> **Explanation:** Overhead absorption rate is the predetermined rate at which variable overhead costs are allocated based on specific metrics such as labor hours or machine hours.
### Which of the following factors does NOT affect standard variable overhead cost?
- [ ] Production efficiency.
- [x] Fixed salaries of employees.
- [ ] Fluctuations in utility costs.
- [ ] Indirect materials prices.
> **Explanation:** Fixed salaries of employees do not affect standard variable overhead cost because they are not variable costs; they remain constant irrespective of production levels.
### What is the primary variable affecting the overhead absorption rate?
- [ ] Product design.
- [ ] Market demand.
- [x] Standard labor or machine hours.
- [ ] Inflation rate.
> **Explanation:** The primary variable affecting the overhead absorption rate is the standard labor or machine hours, which serve as the basis for allocating overhead costs.
### Which expense would NOT be considered a variable overhead cost?
- [ ] Cost of maintenance.
- [ ] Electricity bill that varies with production.
- [x] Monthly rental payments.
- [ ] Indirect materials used in production.
> **Explanation:** Monthly rental payments are not considered variable overhead costs as they are fixed expenses that do not change with the production volume.
### What is variance analysis in the context of standard costs?
- [ ] Accounting for only fixed costs.
- [ ] Comparing budgeted costs with past costs.
- [x] Comparing actual costs to standard costs to identify discrepancies.
- [ ] Analyzing year-on-year profit margins.
> **Explanation:** Variance analysis involves comparing actual costs with standard costs to identify any discrepancies and understand the reasons behind variations.
### Which metric is used to allocate standard variable overhead costs?
- [ ] Sales Volume
- [ ] Fixed Overhead Costs
- [x] Standard Time Units
- [ ] Direct Material Cost
> **Explanation:** Standard time units are used to allocate standard variable overhead costs, reflecting the time required for operations or product production.
Thank you for exploring the intricate details of standard variable overhead cost and tackling our challenging quiz. Keep honing your financial acumen!
