What is overhead variance?

Overhead variance refers specifically to the deviation between actual overhead costs incurred and the amount of overhead that was allocated based on a predetermined rate or budgeted figure. This concept is crucial for understanding how effectively a company controls its overhead expenses.

When determining overhead variance, the focus lies on comparing the overhead costs that were expected (allocated) against what was actually spent. This variance can be broken down into two components: variable overhead variance and fixed overhead variance, which helps management identify areas where costs may be exceeding expectations.

This distinction is important because it provides insight into how well the company is managing its resources versus how the operations were planned. Understanding overhead variance is essential for improving budgeting accuracy and overall operational efficiency.

The other options represent different concepts that, while related to costs and budgeting, do not accurately define overhead variance as it specifically pertains to the difference between the actual overhead incurred and the overhead allocated for a given period.