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Chilton allocates variable manufacturing overhead costs on the basis of machine hours. Chilton budgeted .5 machine hours per lamp and allocates overhead at a rate of $1.80 per machine hour. Last year Chilton manufactured 23,000 lamps, used 13,800 machine hours and incurred actual overhead costs of $15,180.
Variable overhead is analyzed with two variances, which are: Variable overhead efficiency variance. This is the difference between the actual and budgeted hours worked, which are then applied to the standard variable overhead rate per hour. Variable overhead spending variance. This is the difference between the actual spending and the budgeted rate of spending on variable overhead. The variable overhead concept can also be applied to the administrative side of a business. If so, it refers to those administrative costs that vary with the level of business activity.