VOH cost variance summary
Common examples of VOH include indirect materials (e.g., lubricants, cleaning supplies), indirect labor (e.g., wages of machine operators’ assistants), and utilities like electricity tied to production.
The cost drivers for VOH depend on the nature of the production process and the type of overhead incurred. For instance if VOH is closely tied to material usage, the cost driver might be the quantity of materials used. If VOH is more closely linked to indirect labor, the cost driver could be labor hours worked.
In practice, if the CMA exam problem does not explicitly state the cost driver, labor hours are often used as the default for VOH. This discussion uses labor hours as the cost driver.
The computation of VOH variances is identical to the method used for direct labor variances. Understanding these variances provides insight into cost control and production efficiency for overhead costs, which often represent a significant portion of total manufacturing costs.
The basic formula of the VOH cost variance is as follows:
Oftentimes the first step in solving overhead variance questions is calculating the standard VOH rate per unit of the cost driver (e.g., per labor hour), referred to above as the “standard rate”. When this is not provided, we need to calculate it manually by using inputs from the master budget:
The variable overhead cost variance is broken down into different components to isolate the sources of deviations of actual VOH costs from standard VOH costs. The variance primarily arises from two sources:
- differences between the standard rate and the actual rate paid for VOH (variable overhead spending variance); and
- differences between the standard hours allowed and the actual hours worked (variable overhead efficiency variance).
Variable overhead spending variance
The formula for calculating variable overhead spending variance is:
It can also be expressed in terms of the formulas:
Where:
- is the actual VOH rate
- is the standard VOH rate, calculated from the master budget when it isn’t given directly
- is the actual quantity of the cost driver incurred in production (for example, actual labor hours worked)
The VOH spending variance reflects the difference between the actual VOH rate paid per hour and the standard VOH rate established in the budget. Because the actual rate is total actual VOH divided by actual driver hours, the spending variance captures both price changes in overhead items and how economically those items were used per hour - for example, wasting supplies or electricity drives up the actual rate even if prices haven’t changed.
When the actual rate exceeds the standard rate, the variance is unfavorable, since higher overhead costs per hour reduce operating income. A favorable spending variance isn’t automatically good news either - buying cheaper, lower-quality supplies can drive excess usage elsewhere, so favorable/unfavorable only describes the effect on operating income, not whether the outcome is good for the company.
Variable overhead efficiency variance
The formula for calculating variable overhead efficiency variance is:
It can also be expressed in terms of the formulas:
Where:
- is the standard quantity of the cost driver allowed for the actual production achieved (see the sidenote below for how to calculate it)
When applying inputs into the formula, a positive variance indicates a favorable variance, while a negative variance signifies an unfavorable variance.
If the standard hours allowed for actual production exceed the actual hours used, the efficiency variance is favorable - fewer cost-driver hours (for example, direct labor hours) were used than the standard allows for the actual output, so less variable overhead was incurred than anticipated.
Overview of variance formula
The total of all VOH variances should equal the variable overhead cost variance. This provides a useful way to verify the accuracy of your calculations by comparing the sum of the individual variances to the total VOH cost variance.