diff --git a/apps/builder/app/builder/features/settings-panel/variables-section.tsx b/apps/builder/app/builder/features/settings-panel/variables-section.tsx
index 7ac61f4bf0b1..00e284e518e5 100644
--- a/apps/builder/app/builder/features/settings-panel/variables-section.tsx
+++ b/apps/builder/app/builder/features/settings-panel/variables-section.tsx
@@ -48,25 +48,30 @@ import {
 import {
   $selectedInstance,
   $selectedInstanceKey,
+  $selectedInstancePath,
   $selectedPage,
 } from "~/shared/awareness";
 
 /**
  * find variables defined specifically on this selected instance
  */
-const $instanceVariables = computed(
-  [$selectedInstance, $dataSources],
-  (instance, dataSources) => {
-    const matchedVariables: DataSource[] = [];
-    if (instance === undefined) {
-      return matchedVariables;
+const $availableVariables = computed(
+  [$selectedInstancePath, $dataSources],
+  (instancePath, dataSources) => {
+    if (instancePath === undefined) {
+      return [];
     }
-    for (const dataSource of dataSources.values()) {
-      if (instance.id === dataSource.scopeInstanceId) {
-        matchedVariables.push(dataSource);
+    const availableVariables = new Map<DataSource["name"], DataSource>();
+    // order from ancestor to descendant
+    // so descendants can override ancestor variables
+    for (const { instance } of instancePath.slice().reverse()) {
+      for (const dataSource of dataSources.values()) {
+        if (dataSource.scopeInstanceId === instance.id) {
+          availableVariables.set(dataSource.name, dataSource);
+        }
       }
     }
-    return matchedVariables;
+    return Array.from(availableVariables.values());
   }
 );
 
@@ -181,19 +186,19 @@ const EmptyVariables = () => {
 
 const VariablesItem = ({
   variable,
+  source,
   index,
   value,
   usageCount,
 }: {
   variable: DataSource;
+  source: "local" | "remote";
   index: number;
   value: unknown;
   usageCount: number;
 }) => {
-  const label =
-    value === undefined
-      ? variable.name
-      : `${variable.name}: ${formatValuePreview(value)}`;
+  const labelValue =
+    value === undefined ? "" : `: ${formatValuePreview(value)}`;
   const [inspectDialogOpen, setInspectDialogOpen] = useState(false);
   const [isMenuOpen, setIsMenuOpen] = useState(false);
   return (
@@ -201,7 +206,13 @@ const VariablesItem = ({
       <CssValueListItem
         id={variable.id}
         index={index}
-        label={<Label truncate>{label}</Label>}
+        label={
+          <Flex align="center">
+            <Label color={source}>{variable.name}</Label>
+            {labelValue}
+          </Flex>
+        }
+        disabled={source === "remote"}
         data-state={isMenuOpen ? "open" : undefined}
         buttons={
           <>
@@ -234,13 +245,15 @@ const VariablesItem = ({
                   <DropdownMenuItem onSelect={() => setInspectDialogOpen(true)}>
                     Inspect
                   </DropdownMenuItem>
-                  <DropdownMenuItem
-                    // allow to delete only unused variables
-                    disabled={variable.type === "parameter" || usageCount > 0}
-                    onSelect={() => deleteVariable(variable.id)}
-                  >
-                    Delete {usageCount > 0 && `(${usageCount} bindings)`}
-                  </DropdownMenuItem>
+                  {source === "local" && (
+                    <DropdownMenuItem
+                      // allow to delete only unused variables
+                      disabled={variable.type === "parameter" || usageCount > 0}
+                      onSelect={() => deleteVariable(variable.id)}
+                    >
+                      Delete {usageCount > 0 && `(${usageCount} bindings)`}
+                    </DropdownMenuItem>
+                  )}
                 </DropdownMenuContent>
               </DropdownMenuPortal>
             </DropdownMenu>
@@ -252,7 +265,8 @@ const VariablesItem = ({
 };
 
 const VariablesList = () => {
-  const availableVariables = useStore($instanceVariables);
+  const instance = useStore($selectedInstance);
+  const availableVariables = useStore($availableVariables);
   const variableValues = useStore($instanceVariableValues);
   const usedVariables = useStore($usedVariables);
 
@@ -262,18 +276,18 @@ const VariablesList = () => {
 
   return (
     <CssValueListArrowFocus>
-      {availableVariables.map((variable, index) => {
-        const value = variableValues.get(variable.id);
-        return (
-          <VariablesItem
-            key={variable.id}
-            value={value}
-            variable={variable}
-            index={index}
-            usageCount={usedVariables.get(variable.id) ?? 0}
-          />
-        );
-      })}
+      {availableVariables.map((variable, index) => (
+        <VariablesItem
+          key={variable.id}
+          source={
+            instance?.id === variable.scopeInstanceId ? "local" : "remote"
+          }
+          value={variableValues.get(variable.id)}
+          variable={variable}
+          index={index}
+          usageCount={usedVariables.get(variable.id) ?? 0}
+        />
+      ))}
     </CssValueListArrowFocus>
   );
 };
diff --git a/apps/builder/app/builder/shared/binding-popover.tsx b/apps/builder/app/builder/shared/binding-popover.tsx
index 50396662886f..c68b5868f0f8 100644
--- a/apps/builder/app/builder/shared/binding-popover.tsx
+++ b/apps/builder/app/builder/shared/binding-popover.tsx
@@ -8,6 +8,7 @@ import {
   createContext,
   type ReactNode,
 } from "react";
+import { useStore } from "@nanostores/react";
 import {
   DotIcon,
   InfoCircleIcon,
@@ -47,7 +48,6 @@ import {
   $isDesignMode,
   computeExpression,
 } from "~/shared/nano-states";
-import { useStore } from "@nanostores/react";
 
 export const evaluateExpressionWithinScope = (
   expression: string,
diff --git a/apps/builder/app/shared/instance-utils.ts b/apps/builder/app/shared/instance-utils.ts
index c99d1bb514e7..dc2c153de4f0 100644
--- a/apps/builder/app/shared/instance-utils.ts
+++ b/apps/builder/app/shared/instance-utils.ts
@@ -1087,14 +1087,16 @@ export const insertWebstudioFragmentCopy = ({
         dataSources.set(newDataSourceId, {
           ...dataSource,
           id: newDataSourceId,
-          scopeInstanceId: newInstanceIds.get(scopeInstanceId),
+          scopeInstanceId:
+            newInstanceIds.get(scopeInstanceId) ?? scopeInstanceId,
           resourceId: newResourceId,
         });
       } else {
         dataSources.set(newDataSourceId, {
           ...dataSource,
           id: newDataSourceId,
-          scopeInstanceId: newInstanceIds.get(scopeInstanceId),
+          scopeInstanceId:
+            newInstanceIds.get(scopeInstanceId) ?? scopeInstanceId,
         });
       }
     }
diff --git a/apps/builder/app/shared/nano-states/props.test.ts b/apps/builder/app/shared/nano-states/props.test.ts
index 1ea43050287c..debc382a3d2f 100644
--- a/apps/builder/app/shared/nano-states/props.test.ts
+++ b/apps/builder/app/shared/nano-states/props.test.ts
@@ -93,12 +93,14 @@ test("compute expression prop values", () => {
     toMap([
       {
         id: "var1",
+        scopeInstanceId: "box",
         type: "variable",
         name: "",
         value: { type: "number", value: 1 },
       },
       {
         id: "var2",
+        scopeInstanceId: "box",
         type: "variable",
         name: "",
         value: { type: "string", value: "Hello" },
@@ -162,6 +164,7 @@ test("generate action prop callbacks", () => {
     toMap([
       {
         id: "var",
+        scopeInstanceId: "box",
         type: "variable",
         name: "",
         value: { type: "number", value: 1 },
@@ -292,6 +295,7 @@ test("compute expression from collection items", () => {
     toMap([
       {
         id: "itemId",
+        scopeInstanceId: "list",
         type: "parameter",
         name: "item",
       },
@@ -362,6 +366,7 @@ test("access parameter value from variables values", () => {
     toMap([
       {
         id: "parameterId",
+        scopeInstanceId: "body",
         type: "parameter",
         name: "paramName",
       },
@@ -400,6 +405,7 @@ test("compute props bound to resource variables", () => {
     toMap([
       {
         id: "resourceVariableId",
+        scopeInstanceId: "body",
         type: "resource",
         name: "paramName",
         resourceId: "resourceId",
diff --git a/packages/design-system/src/components/css-value-list-item.tsx b/packages/design-system/src/components/css-value-list-item.tsx
index 54728f82ca1c..e77cb787b311 100644
--- a/packages/design-system/src/components/css-value-list-item.tsx
+++ b/packages/design-system/src/components/css-value-list-item.tsx
@@ -180,7 +180,7 @@ export const CssValueListItem = forwardRef(
               {...listItemAttributes}
               {...rest}
               hidden={hidden}
-              disabled={hidden === true}
+              disabled={hidden === true || rest.disabled}
             >
               <DragHandleIconStyled />
 
diff --git a/packages/sdk/src/schema/data-sources.ts b/packages/sdk/src/schema/data-sources.ts
index 8ad76ba47023..003a8a82ceaf 100644
--- a/packages/sdk/src/schema/data-sources.ts
+++ b/packages/sdk/src/schema/data-sources.ts
@@ -30,20 +30,20 @@ export const DataSource = z.union([
   z.object({
     type: z.literal("variable"),
     id: DataSourceId,
-    scopeInstanceId: z.optional(z.string()),
+    scopeInstanceId: z.string(),
     name: z.string(),
     value: DataSourceVariableValue,
   }),
   z.object({
     type: z.literal("parameter"),
     id: DataSourceId,
-    scopeInstanceId: z.optional(z.string()),
+    scopeInstanceId: z.string(),
     name: z.string(),
   }),
   z.object({
     type: z.literal("resource"),
     id: DataSourceId,
-    scopeInstanceId: z.optional(z.string()),
+    scopeInstanceId: z.string(),
     name: z.string(),
     resourceId: z.string(),
   }),