Variable Overhead Efficiency Variance

Learning Outcomes

  • Compute the variable overhead efficiency variance

As a formula, the Variable Overhead Efficiency Variance is similar to the direct materials efficiency variance and the direct labor efficiency variance. We use the actual quantity of the cost driver for Actual Quantity (AQ) and the expected quantify for the Standard Quantity (SQ), and the burden rate for Standard Cost (SC):

Variable Overhead Efficiency Variance = (AQ – SQ) x SC

A picture of a guitarAlternatively, the Variable Overhead Efficiency Variance could be calculated by multiplying Actual Quantity (AQ) by the Standard Cost (SC) which would give the total variable overhead without regard to the expected rate, and from that, subtracting from it the product of the Standard Quantity (SQ) multiplied by the Standard Cost (SC) which would give the total expected variable overhead if we’d predicted it accurately. By using standard cost against both the actual and expected quantity, we get the variance in dollars that is attributed to quantity only.

(AQ x SC) – (SQ x SC)

Boulevard Blanks has decided to allocate overhead based on direct labor hours (DLH).  The standard variable OH rate per DLH is $0.80 (calculated previously) and the actual variable overhead for the month was $1,395 for 2,325 actual direct labor hours giving an actual rate of $0.60.

It took our workers 2,325 hours to do what we expected them to do in 2,430 hours. Let’s do the calculation:

(AQ – SQ) x SC

(2,325 – 2,430) x $0.80 = -105 x $0.80 = -$84.00

Alternatively:

(AQ * SC) – (SQ * SC) = (2,325 * $0.80) – (2,430 * $0.80) = $1,860 – $1,944 = -$84.00

Even though the answer is a negative number, the variance is favorable because we used less indirect materials than we budgeted.

Let’s look at the two variances together:

Description Amount Favorable or Unfavorable
Variable Overhead Cost Variance $(465.00)
Variable Overhead Efficiency Variance (84.00)
Single Line      $ (549.00)Double line Favorable

And relate them back to the budget v. actual report:

Boulevard Blanks
Partial Income Statement
For the month ended July 31, 20XX
Actual Budget
Sales revenue $        178,200.00 $        178,200.00
Subcategory, Variable manufacturing costs Single Line Single Line
      Direct materials           38,080.00           38,880.00
      Direct Labor           46,500.00           43,740.00
      Allocated overhead             1,395.00             1,944.00
Subcategory, Fixed manufacturing costs
      Allocated overhead           13,485.00           13,365.00
Cost of Goods Manufactured and sold Single Line          99,460.00 Single Line          97,929.00
Gross Profit Single Line$        78,740.00Double line Single Line$        80,271.00Double line

 

We can double-check our work by reconciling the two variances to the overall variance in the budget:
(actual quantity x actual cost) – (standard quantity x standard cost)

AQ AP SQ SC TOTAL VAR Favorable or Unfavorable
    2,325.00 $ 0.60 $ 1,395.00 Actual indirect variable costs
    2,430.00             0.80     1,944.00 Budgeted indirect variable costs
Variance Single Line    $(549.00)Double line Favorable

 

Again, in reporting to our internal users, we would omit the parenthesis that we use in accounting to show a negative amount, since that may confuse non-financial managers who are relying on the report. We would show the variances as follows:

Description Amount Favorable or Unfavorable
Variable Overhead Cost Variance $465.00 Favorable
Variable Overhead Efficiency Variance 84.00 Favorable
Overall Variable Overhead Variance Single Line      $ 549.00Double line Favorable

 

This shows that our VOH costs are under-budget. Remember that both the cost and efficiency variances, in this case, were negative showing that we were under budget, making the variance favorable.

Before we go on to explore the variances related to fixed indirect costs (fixed manufacturing overhead), check your understanding of the variable overhead efficiency variance.

Practice Question