Distinguish between the four-variance, three-variance, two-variance, and one-variance approaches for computing factory overhead variances

Answer 1

The four variance approach is the most complete measurement of all of the overhead variances. It is composed of four separate variances:

Variable
Spending = Actual VOH - (VOH Rate x AQ)
Efficiency = (VOH Rate x AQ) - (VOH Rate x SQ)

Fixed
Spending = Actual FOH - Budgeted FOH
Volume = Budgeted FOH - (FOH rate x SQ)

The three variance approach computes the following variances:
Spending--Total Actual Overhead - [(VOH x AQ) + Budgeted FOH]--This equals
the variable and fixed overhead spending variances computed under the four variance
approach.
Efficiency--[(VOH rate x AQ) + BFOH] - [(VOH rate x SQ) + BFOH]--This equals
the variable OH efficiency variance computed under the four-variance approach.
Volume--BFOH - (FOH rate x SQ) This equals the volume variance computed
under the four variance approach.

The two variance approach computes the following variances:
Budget--Total Actual Overhead - [VOH rate x SQ + Budgeted FOH]-- Equals the
spending and efficiency variances computed under the three variance approach.
Volume--same as volume variance under the four variance approach.

The one variance approach simply subtracts total actual overhead from the combined fixed and variable overhead rate times the standard quantity.

The one-, two-, and three- variance approaches are generally used when there is not sufficient information to compute four variances.