Controllable Variance
Controllable variance includes both variable and fixed overhead variance which the company is able to manage. It is the variance that can be changed or adjusted by the management. Controllable variance is the difference between the actual and budgeted expenses base on standard costing. It can be a favorable and unfavorable variance.
If the actual expense is higher than the budget, it is an unfavorable variance. On the other hand, if the actual expense is lower than the budget, it is a favorable variance.
The amount of money that a company has available to spend on a project is its budget. The actual amount of money that is spent on a project is the actual expense. If the actual expense is higher than the budget, it means that the company has spent more money than it had available. This can happen for a variety of reasons, including unexpected expenses or cost overruns. If the actual expense is lower than the budget, it means that the company has saved money on the project.
When it comes to business, variance can broadly be categorized into two categories: volume variance and rate variance. When it comes to volume variance, it occurs because of the change in sales volume or the differing usage rates of different goods and services. This type of variance is commonly seen when businesses first open their doors as they are trying to find their footing in the market and get a feel for customer demand. Rate variance, on the other hand, is caused by changes in the price of goods and services or the wages paid to employees. This type of variance is less common than volume variance but can have a significant impact on business operations, especially if prices fluctuate rapidly or there are large swings in employee wages. Ultimately, understanding and being able to manage both types of variance is critical for any business owner or manager.
Overhead Controllable Variance
Overhead variance is the difference between the budgeted overhead, which is the result of applying a predetermined overhead rate to the production output, and the actual overhead occurs.
It is the responsibility of the factory management to overlook the cost to ensure that they are under control. It should be over the standard cost which we have estimated during the planning stage. Any huge variance will impact budget and business strategy. It may unexpectedly turn the profit and loss statement upside down.
Both fixed and variable overhead is similar to fixed and variable costs. Fixed overhead consists of the overhead costs that remain the same as production increases or decreases. A good example of this is rent. The rent expense will stay the same no matter how many or how few products are produced during the period. Variable overhead, on the other hand, fluctuates with production levels. An example of this would be electricity usage. The more products produced, the higher the electricity bill will be. When looking at these two types of overhead, it’s important to remember that fixed overhead cannot be changed in the short term, while variable overhead can be controlled to some degree through production levels. Therefore, when planning for overhead costs, it’s important to take both fixed and variable overhead into account.
Overhead variance consists of both variable and fixed variance.
Controllable Variance Example
For example, Company A produces 10,000 units of product during the month. Based on the predetermined overhead rate, the company should spend $ 15 per unit. So the budget overhead cost should be $ 150,000. However, the actual total overhead is 170,000 for the production of 10,000 units.
Controllable variance = $ 170,000 – (10,000 units * $ 15) = $ 20,000
This variance includes both variable and fixed costs which we need to separate and analyze.
Uncontrollable Variance
No business is without variance – it’s an inherent part of the risk involved in managing any commercial enterprise. But when that variance starts to whip out of control, it can have a major impact on your business’s bottom line. That’s why it’s important to keep a close eye on controllable and uncontrollable variance in your operation.
Controllable variance is the kind that you can do something about; for example, if you find that deliveries are consistently late, you might review your shipping procedures to see where improvements can be made.
Uncontrollable variance, on the other hand, is outside of your control; for example, if raw material prices fluctuate wildly, there’s not much you can do about it except adjust your pricing accordingly. Uncontrollable variance can have a significant impact on the bottom line of any business. The key to managing both types of variance is understanding their causes and effects on your business. Only then can you put in place the necessary controls to minimize the impact of uncontrolled variance and maximize the benefits of controlled variance.