A volume variance is the difference between the actual quantity sold or consumed and the budgeted or amount expected to be sold or consumed, multiplied by the standard price per unit. This variance is used as a general measure of whether a business is generating the amount of unit volume for which it had planned. A spending variance is the difference between the actual and expected (or budgeted) amount of an expense.
To analyze under or over applied overhead into variances, it is necessary to classify overhead costs as fixed or variable, as explained at the start of the chapter. Fixed overhead. costs do not change (in total) as production levels change. In contrast to fixed . costs are variable costs, which do change (in total) as production levels change.
A volume variance results when the fixed overhead applied during a period differs from the fixed overhead budgeted for the ‘.same period. This variance measures the effect of a change in the volume of production:A spending variance results when the actual overhead for a .period differs from the amount that should have been spent for the number of hours worked.
To illustrate how to compute these variances, let’s look at the actual and applied overhead for January (supposed amoUnts):
• 

Department  Actual Costs  Applied Costs  Underapplied or Overapplied. 
Shaping  Rs.13,929.28  Rs.12,563.68  Rs. 1,365.60 under 
Finishing  Rs. 8,231.19  Rs. 9,240.00  Rs.1,008.81 over 
Shaping Department:
To analyze the Rs.I,365.60 underapplied overhead in the Shaping Department, we must
classify the department’s overhead costs as fixed and variable. To do this, let’s look at the overhead application rate suppose:
Estimated factory overhead Rs.142,948
= Rs.5.96
Estimated direct labour hours 24,000
An examination of the budgeted overhead of the Shaping Department shows that
Rs.62,400 is fixed (suppose). The remaining Rs.80,548 (Rs.142,948 — Rs.62,400) is variable. The overhead application rate of Rs.5.96 can now be broken down as follows:
Estimated fixed factory overhead Rs.62,400
= Rs.2.60 fixed overhead per direct labour hour
24,000
Estimated variable factory overhead = Rs.80,548
= Rs.3.36 variable overhead per direct labour hour
As we can see, the Shaping Department has budgeted (estimated) 24,000 direct labour hours for the year. Thus, the average monthly direct labour hours for this department is 2,000 (24,000 divided by 12 months). If the actual number of direct labour hours worked in a month were exactly 2,000, the amount of fixed overhead charged to production would be equal to the fixed costs budgeted (estimated).
To illustrate this, first multiply 2,000 hours by the fixed overhead rate per hour; 2,000 x Rs.2.60 = Rs.5,200. This gives us the amount of fixed overhead that would have been applied during the month had the actual number of direct hours worked in the Shaping Department been exactly 2,000. Now, divide the department’s budgeted fixed overhead by 12 months: Rs.62,400 ± 12 7= Rs.5,200. As we can see, the two figures are the same. However, (he actual number of direct labour hours worked during the month was not 2,000. According to payroll records, the actual direct labour hours worked were 2,108. Thus, since the actual number of direct labour hours worked during the month differs from the estimated number of direct labour hours used in determining the overhead application rate, an overhead volume variance
exists.
The overhead volume variance accounts for only part of the reason that • the applied overhead in the Shaping Department differed from the actual overhead. The remainder of the difference is due to a spending variance. We can analyze the varianceas follows:
Estimated direct labour hours
Estimated direct labour hours 24,000
Volume Variance:
Fixed overhead applied (2,108 x Rs.2.60) Rs. 5,480.80
Fixed overhead budgeted (Rs.62,400 — 12)…. ••••• ••••• 5.200.00
Volume Variance (favorable)
Rs.280.80
Spending Variance:
Total actual overhead for the month ….. ••••• •••••
Budgeted overhead for hours worked.
Fixed ….. ••••• ••••• Rs.5,200.00
Variable (2,108 x Rs.3.36)…. 7,082.88 Rs.13,929.28
Total budgeted ….. ••••• ••••• ••••• ••••• ••••• 12,282.88
Spending Variance (unfavourable) •••• ••••• (1,646.40)
Total variance (unfavourable)….. •••• •••• Rs.1,365.60
From this we can see that the volume variance of Rs.280.80 is favourable. It is favourable because the department actually worked 2,108 direct labour hours without an increase in fixed costs, which had been budgeted based on 2,000 hours. In other words, the department received a benefit from operating at a level above that budgeted.
Finishing Department:
Overhead in the Finishing Department was overapplied by Rs.1,008.80. This amount, too, can be analyzed into volume and spending variances. Suppose, an examination of the budgeted overhead in the department revealed that Rs.48,600 is fixed and the remaining Rs.52,220 (Rs.100,820 — Rs.48,600) is variable. As before, our first task is to break down the
department’s Rs.5.60 (Rs.100,820 18,000 hours) hourly overhead application rate into a
fixed rate per hour and a variable rate per hour, as follows:
Estimated fixed factory overhead Rs.48,600
= = Rs.2.70 fixed overhead per direct labour hour
Estimated direct labour hours 18,000
Budgeted fixed factory overhead • Rs.52,220
= Rs.2.90 variable overhead per direct labour hour
Budgeted direct labour hours 18,000
The number of direct labour hours budgeted for the month is 1,500 (18,000 ± 12). However, payroll records show that the actual direct labour hours worked during the month totaled 1,650. Using these data, we can analyze the department’s overapplied overhead into
variances, as follows:
Volume Variance:
Fixed overhead applied (1,650 x Rs.2.70) 
••••• 
….. 
Rs. 4,455.00 

Fixed overhead budgeted (Rs.48,600 ± 12)…. 
••••• 
••••• 
4,050.00 

Volume Variance (favorable) ….. ••••• 
••••• 
••••• 
Rs. 
405.00 

Spending Variance: 

Total actual overhead for the month ….. ••••• 
••••• 
Rs. 8,231.19 

Budgeted overhead for hours worked. 
Fixed ….. • •••• ••••• Rs.4,050.00
Variable (1,650 x Rs.2.90)…. 4,785.00
Total budgeted ….. 8,835.00
Spending Variance (favourable) ••••• ••••• 603.81
Total variance (favourable) ….. ••••• ••••• Rs.1,008.81
The volume variance is favourable because the actual direct labour hours worked exceeded those budgeted. The spending variance is favourable because the actual overhead was less than the amount budgeted.