Occurrence of Overhead Variances

Overhead variances arise mainly because of the conventions of the overheads absorption process. The overhead absorption rates employed in this process are calculated from two major estimates as:

i. Estimates of expenditure levels.

ii. Estimates of the activity levels throughout the budget period.

Because the two elements are mere estimates, they hardly coincide along with reality, and hence will almost certainly purpose a favourable or unfavourable variance in any type of given accounting period. Overhead variances are caused via efficiency variations also. Since overheads are frequently absorbed efficiency is less or greater than planned.