What is a Spending Variance?
A spending variance is the difference between the actual and expected (or budgeted) amount of an expense. By calculating this variance, you can gain a better understanding of your organization’s level of purchasing and operating efficiency. This is useful information for managing and budgeting for a business. For example, if a company incurs a $500 expense for utilities in January and expected to incur a $400 expense, there is a $100 unfavorable spending variance. The spending variance concept is commonly applied to the areas noted below.
Direct Materials Spending Variance
The spending variance for direct materials is known as the purchase price variance, and is the actual price per unit minus the standard price per unit, multiplied by the number of units purchased.
Direct Labor Spending Variance
The spending variance for direct labor is known as the labor rate variance, and is the actual labor rate per hour minus the standard rate per hour, multiplied by the number of hours worked.
Fixed Overhead Spending Variance
The spending variance for fixed overhead is known as the fixed overhead spending variance, and is the actual expense incurred minus the budgeted expense.
Variable Overhead Spending Variance
The spending variance for variable overhead is known as the variable overhead spending variance, and is the actual overhead rate minus the standard overhead rate, multiplied by the number of units of the basis of allocation (such as hours worked or machine hours used).
Administrative Overhead Spending Variance
The variance calculation is normally applied to each individual line item within this general category of expense.
