VOH cost variance scenario

VOH variance scenario

ChocoDelight Cookies has a production process that involves indirect labor in addition to direct labor and materials. The company employs quality control inspectors as part of its variable overhead (VOH) costs. These inspectors ensure the quality of every batch of cookies and are paid based on hours worked. To evaluate overhead cost management, the company wants to analyze its VOH spending and efficiency variances.

Standard VOH data

• Standard VOH rate: $12 per direct labor hour.
• Standard hours: 10 direct labor hours per 1,000 cookies.

Actual VOH data

In the recent production batch of 1,500 cookies, the company incurred an actual variable overhead rate of $14 per direct labor hour, exceeding the standard VOH rate. The production required a total of 16 direct labor hours, and the total variable overhead costs incurred amounted to $224.

Calculate the VOH variances:

1. VOH spending variance
2. VOH efficiency variance
3. VOH cost variance

Definitions

SR (standard rate)

The standard variable overhead rate per direct labor hour.

AR (actual rate)

The actual variable overhead rate per direct labor hour incurred.

SH (standard hours)

The direct labor hours standard allows for the actual production achieved.

AH (actual hours)

The actual direct labor hours used in production.

Exam tip: The formulas below are written standard − actual. For a cost, a negative result means actual cost exceeded standard, which lowers operating income - so the variance is unfavorable (U). If you learned the actual − standard version instead, the sign flips but the favorable or unfavorable label doesn’t change.

The spending variance measures the difference between the actual and standard overhead rate per hour. The efficiency variance measures the effect of using more or fewer direct labor hours than standard allows - it’s driven by direct labor hour usage, not by how efficiently the overhead itself (like inspectors’ time) was used.

Scenario 1.1. VOH spending variance

$$\begin{array}{rl}\text{VOH spending variance}& =\text{(SR × AH) − (AR × AH)}\\ & =(12\times 16)-(14\times 16)\\ & =192-224\\ & =-32\text{, i.e., }32(\text{U})\end{array}$$

The unfavorable variance of $32 indicates that the actual variable overhead rate exceeded the standard rate by $2 per hour, leading to higher-than-expected costs for the quality control process.

Scenario 1.2. VOH efficiency variance

The $\text{Standard hours (SH)}$ in this computation should be computed as the standard hours expected based on actual production of 1,500 cookies. If 10 hours are required per 1,000 cookies, it means $\text{15 hours}$ are expected to be incurred for 1,500 cookies produced.

$$\text{Standard hours (SH)}=\text{10 hours × (1,500 ÷ 1,000) = 15 hours}$$

Once we have all inputs, we can compute the VOH efficiency variance:

$$\begin{array}{rl}\text{VOH efficiency variance}& =\text{(SR × SH) − (SR × AH)}\\ & =(12\times 15)-(12\times 16)\\ & =180-192\\ & =-12\text{, i.e., }12(\text{U})\end{array}$$

The $12 (U) arises because VOH is applied per direct labor hour: production used 1 more direct labor hour than the 15 allowed, so $12 more VOH was applied. It says nothing about whether inspectors’ time or other overhead items were used efficiently - its cause is the same one behind the direct labor efficiency variance.

Scenario 1.3. VOH cost variance

The VOH cost variance can be computed by adding up the spending and the efficiency variances:

$$\begin{array}{rl}\text{VOH cost variance}& =\text{VOH spending variance}+\text{VOH efficiency variance}\\ & =32(\text{U})+12(\text{U})\\ & =44(\text{U})\end{array}$$

Computed directly, it is the standard VOH for the actual output minus the actual VOH:

$$\begin{array}{rl}\text{VOH cost variance}& =(\text{SR × SH})-(\text{AR × AH})\\ & =(12\times 15)-(14\times 16)\\ & =180-224\\ & =-44\text{, i.e., }44(\text{U})\end{array}$$

The $44 (U) total points to two different root causes that call for different corrective actions. The $32 (U) spending variance could stem from a wage increase for the quality control inspectors or overtime premiums paid during the batch - worth reviewing actual pay rates against the standard. The $12 (U) efficiency variance suggests the batch used more direct labor hours than planned, perhaps due to slower production crews or rework - worth investigating labor scheduling and training. Under management by exception, whether a $44 variance is large enough to investigate depends on the company’s materiality threshold.