This is the portion of overhead cost variance that arises due to the actual variable overheads differing from the allowed variable overhead. This arises when the company uses more time to manufacture the product due to defects in production.
This arises due to actual number of units sold differing from the budgeted number of units at standard sales margin per unit this may be due to increased taste and preference of consumers, or increase in quality and advertisements.
SMPV arises as a result of real selling charge differing from the standard selling cost. This is influenced by prices of competitors, demand for the product or even the price of compliments to the product.
Traditionally, overheads have been absorbed to products based on direct labour hours used direct labour cost machine hours utilized or number of units produced. This traditional method of absorbing overheads emerged when factor overhead constituted a small proportion of the manufacturing cost. There was an assumption of a linear relationship between the volume of production and the use of this activity basis. However overheads have recently grown significantly as a proportion of production cost in a decline in direct labour cost and the computerization of the production or manufacturing systems.
Consequently, the relevance of continued use of the traditional overhead costing method has been watered with the emergence of new methods of production such as robotic technologies. Flexible manufacturing systems, computer manufacturing kaizen costing and activity based costing.
Activity based costing is the cost attribution to cost units on the basis of the benefit the product receives from the activity performed such as ordering, material receiving and handling, setting up machines, scheduling of jobs or assurance of quality.
ABC argues that overheads are incurred because of the activities being performed to