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

For every 1,000 cookies produced, ChocoDelight Cookies allocates standard variable overhead costs at a rate of $12 per direct labor hour. The production process is expected to require 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

Scenario 1.1. VOH spending variance

$$\begin{array}{rl}\text{VOH Spending Variance}& =\text{(SR × AH) − (AR × AH)}\\ & =(12\times 16)-(14\times 16)\\ & =192-224\\ & =32(\text{U})\end{array}$$

Alternative computation:

$$\begin{array}{rl}\text{VOH Spending Variance}& =\text{(SR − AR) × AH}\\ & =(12-14)\times 16\\ & =-2\times 16\\ & =32(\text{U})\end{array}$$

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:

$$\begin{array}{rl}\text{VOH Efficiency Variance}& =\text{(SR × SH) − (SR × AH)}\\ & =(12\times 15)-(12\times 16)\\ & =180-192\\ & =12(\text{U})\end{array}$$

Alternative computation:

$$\begin{array}{rl}\text{VOH Efficiency Variance}& =\text{(SH − AH) × SR}\\ & =(15-16)\times 12\\ & =-1\times 12\\ & =12(\text{U})\end{array}$$

The unfavorable variance of $12 reflects that actual labor hours exceeded the expected hours for producing 1,500 cookies, leading to increased variable overhead costs.

Scenario 1.3. VOH cost variance

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

$$\begin{array}{rl}\text{VOH Cost Variance}& =\text{VOH Spending Variance}+\text{VOH Efficiency Variance}\\ & =32(\text{U})+12(\text{U})\\ & =44(\text{U})\end{array}$$

Alternatively:

$$\begin{array}{rl}\text{VOH Cost Variance}& =\text{(SH × SR) − (AH × AR)}\\ & =(15\times 12)-(16\times 14)\\ & =180-224\\ & =\text{44 (U)}\end{array}$$

The total unfavorable variance of $44 highlights both higher-than-expected variable overhead rates and inefficiencies in labor hours, leading to increased overall costs.