What does the variable overhead spending variance mean?
The meaning of the variable overhead spending variance is confusing because the variance cannot be interpreted precisely. This is because it is a mixed price and quantity variance, and normally there is no way to separate the price and quantity elements. Why not? Because when we calculate the flexible budget amount, we are using the actual inputs of the activity measure (actual direct labor hours in our example) to estimate the actual quantities of the indirect resources. If the activity measure used to allocate overhead costs is not perfectly correlated with the indirect costs, (i.e., if r2 < 1) then the spending variance will include a variance related to the quantity estimate involved in the calculation. In fact, the variable overhead spending variance will always include a variance caused by an estimating error, i.e., difference between the actual quantities of the indirect resources and the quantity estimates included in the flexible budget. Therefore, further investigation is nee
