Overhead

Overhead can be termed as ongoing business cost required for running a business.

Variable overhead is a pool of indirect costs that are budgeted on the basis of machine hours. The indirect nature of variable-overhead costs causes the different interpretation. An unfavorable spending variance simply means that the total actual cost of variable overhead is higher than expected after adjusting for the actual quantity of machine hours used. An unfavorable spending variance could result from paying a higher than expected price per unit for variable-overhead items. The variance also could result from using more of the variable-overhead items than expected based on the flexible budget.

Suppose, for example, that electricity was the only variable-overhead cost item. An unfavorable variable-overhead spending variance could result from paying a higher than expected price per kilowatt-hour for electricity or from using more than the expected amount of electricity (based on the flexible budget), or both.

ABC, is a costing method which focusing on assigning the cost to the activities at the first stage and then the cost is assigned to the particular goods and services.

A cost driver can be termed as a characteristics of an activity that causes the activity to cause the cost, whereas the cost driver base is used to assign the cost to different activities.

The method that the ABC team used to calculate cost-driver rates is the same method used to develop predetermined overhead rates.

The traditional measure of underapplied overhead costs understates the cost of excess overhead relative to the more accurate ABC measure of costs of unused capacity.