Variable overhead is
an indirect manufacturing cost that changes in direct proportion to the level of production output.
Unlike fixed overhead costs, which remain constant, variable overhead expenses increase as
production rises and decrease as it falls.
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Variable overhead vs. variable cost
It is important to distinguish variable overhead from a direct variable cost.
Variable Overhead: An indirect cost tied to manufacturing activity, but not traceable to
a specific product. Examples include electricity for factory machinery, factory supplies,
and overtime pay for production workers.
Variable Cost: A direct cost that can be directly traced to the production of a single unit.
An example is the raw materials used to build a product.
Examples of variable overhead costs
Utilities: The cost of electricity, gas, and water to run a production facility fluctuates with
the level of output.
Production supplies: Indirect materials and consumables, like lubricants for machines,
that are not part of the finished product.
Shipping and packaging: The cost of shipping and packaging materials typically
increases with the volume of products being sold.
Sales commissions: Payments to salespeople, which rise and fall with the number of
sales they generate.
Indirect labor: Overtime or additional wages paid to factory workers to handle an
increase in production volume.
Why variable overhead matters
Understanding and tracking variable overhead is essential for effective financial management
and strategic decision-making.
Accurate pricing: To set profitable prices, a company must include variable overhead
when calculating the true cost of each unit produced.
Budgeting and planning: Variable overhead is crucial for forecasting expenses,
especially when planning for future changes in production volume.
Profitability analysis: By calculating the contribution margin (revenue minus variable
costs), a business can determine how each sale contributes to covering fixed costs and
generating profit.
Performance evaluation: Comparing actual variable overhead to budgeted amounts
helps management identify inefficiencies and control spending.
How to calculate the variable overhead rate
To calculate the total variable overhead cost, you can use a historical per-unit rate.
Variable overhead rate per unit
Variable Overhead Rate=Total Variable Overhead CostsTotal Units ProducedVariable Overhead
Rate equals the fraction with numerator Total Variable Overhead Costs and denominator Total
Units Produced end-fraction
Variable Overhead Rate=Total Variable Overhead CostsTotal Units Produced
Example:
If a mobile phone manufacturer has a total variable overhead of $20,000 for producing 10,000
phones, their rate is
2perunit[1.4.6].2 p e r u n i t open bracket 1.4 .6 close bracket point
2𝑝𝑒𝑟𝑢𝑛𝑖[1.4.6].
$20,00010,000 units=$2 per unitthe fraction with numerator $ 20 comma 000 and denominator
10 comma 000 units end-fraction equals $ 2 per unit
$20,00010,000 units=$2 per unit
$
If the company plans to produce 15,000 phones in the next period, it can project its total variable
overhead to be $30,000 (15,000 units x $2 per unit).
Variable overhead is an indirect manufacturing cost that changes in direct proportion to the level
of production output. Unlike fixed overhead, which stays constant, variable overhead increases
as production rises and decreases as it falls.
Variable overhead vs. variable cost
It is important to distinguish variable overhead from a direct variable cost.
Variable Overhead: An indirect cost related to manufacturing activity, but not traceable
to a specific product. Examples include electricity for factory machinery, factory
supplies, and overtime pay for production workers.
Variable Cost: A direct cost that is traceable to the production of a single unit. An
example is the raw materials used to build a product.
Examples of variable overhead costs
Utilities: The cost of electricity, gas, and water to run a production facility fluctuates
with the level of output.
Production supplies: Indirect materials and consumables, like lubricants for machines,
that are not part of the finished product.
Shipping and packaging: The cost of shipping and packaging materials typically
increases with the volume of products being sold.
Sales commissions: Payments to salespeople, which rise and fall with the number of
sales they generate.
Indirect labor: Overtime or additional wages paid to factory workers to handle an
increase in production volume.
Why variable overhead matters
Understanding and tracking variable overhead is essential for effective financial management
and strategic decision-making.
Accurate pricing: To set profitable prices, a company must include variable overhead
when calculating the true cost of each unit produced.
Budgeting and planning: Variable overhead is crucial for forecasting expenses,
especially when planning for future changes in production volume.
Profitability analysis: By calculating the contribution margin (revenue minus variable
costs), a business can determine how each sale contributes to covering fixed costs and
generating profit.
Performance evaluation: Comparing actual variable overhead to budgeted amounts
helps management identify inefficiencies and control spending.
How to calculate the variable overhead rate
To calculate the total variable overhead cost, you can use a historical per-unit rate.
Variable overhead rate per unit
Variable Overhead Rate=Total Variable Overhead CostsTotal Units ProducedVariable Overhead
Rate equals the fraction with numerator Total Variable Overhead Costs and denominator Total
Units Produced end-fraction
Variable Overhead Rate=Total Variable Overhead CostsTotal Units Produced
Example:
If a mobile phone manufacturer has a total variable overhead of $20,000 for producing 10,000
phones, their rate is
2perunit[1.4.6].2 p e r u n i t open bracket 1.4 .6 close bracket point
2𝑝𝑒𝑟𝑢𝑛𝑖[1.4.6].
$20,00010,000 units=$2 per unitthe fraction with numerator $ 20 comma 000 and denominator
10 comma 000 units end-fraction equals $ 2 per unit
$20,00010,000 units=$2 per unit
$
If the company plans to produce 15,000 phones in the next period, it can project its total variable
overhead to be $30,000 (
15,000 units×$2 per unit15 comma 000 units cross $ 2 per unit
15,000 units×$2 per unit
).
Thank you
Variable overhead refers to indirect business costs that change in direct proportion
to the level of business or production activity. Unlike fixed overhead, which stays
constant, variable overhead fluctuates with production output, meaning costs
increase with more production and decrease with less. Examples include production
supplies, electricity for manufacturing equipment, and wages for production staff,
according to Corporate Finance Institute, GoCardless, and Investopedia.
Examples of variable overhead
Production supplies: Indirect materials used in the manufacturing process
Utilities: Electricity, water, and gas used to power production equipment
Indirect labor: Wages for workers such as those involved in shipping or handling
products, or overtime pay
Maintenance: Upkeep and repair costs for production machinery
Sales and marketing: Costs like sales commissions, advertising, and packaging
Variable vs. Fixed Overhead
Variable Overhead: Costs directly tied to the volume of production or business
activity.
Fixed Overhead: Costs that remain the same regardless of production levels, such
as rent or salaries.
Semi-variable Overhead: Costs that have a fixed component and a variable
component (e.g., a base utility rate plus a charge for usage).
Fixed manufacturing overhead refers to indirect costs that do not change with
production volume and are necessary for a factory to operate. Examples include
rent, property taxes, insurance, salaries for factory supervisors, and depreciation of
factory equipment. These costs are committed and must be paid regardless of
whether a company produces a lot or a little, making them predictable for budgeting
purposes.
Key characteristics
Production independent: These costs remain constant regardless of how many
units are produced.
Long-term commitment: They represent ongoing expenses that are difficult to
change in the short term.
Predictable: Because they don't fluctuate, they are easier to budget and forecast
than variable costs.
Examples of fixed manufacturing overhead
Rent or mortgage payments for the production facility
Property taxes on the factory
Insurance premiums for the factory and equipment
Salaries for factory managers, supervisors, and other administrative staff not directly
involved in production
Depreciation of factory buildings and machinery
