## Variable Manufacturing Overhead Cost Variance

### Learning Outcomes

• Compute variable manufacturing overhead cost variance

Although various complex computations can be made for overhead variances, we use a simple approach in this text. In this approach, known as the two-variance approach to variable overhead variances, we calculate only two variances—a variable overhead cost variance and a variable overhead efficiency variance.

The variable overhead cost variance shows in one amount how economically overhead services were purchased and how efficiently they were used. This overhead spending variance is similar to the cost variances for materials and labor. We compare the Variable OH rate for budget and actual, using the actual amount of our variable overhead base (machine-hours, direct labor dollars, direct labor hours, etc.)

The variable overhead cost variance is the difference between actual cost (AC) and standard cost allowed (SC) multiplied by the actual quantity of direct labor hours (AQ). In equation form, the variable overhead cost variance can be done in two ways:

• Variable overhead cost variance = (Actual Cost – Standard Cost) x Actual Quantity

OR

• (Actual Cost x Actual Quantity) – (Standard Cost x Actual Quantity)

In other words:

• Variable OH Cost Variance = (Actual Variable OH per base – Std Variable OH per base) x Actual OH base

OR

• Variable OH Cost Variance = (Actual OH base x Actual Variable OH per base) – (Actual OH base x Std Variable OH per base)

Boulevard Blanks has decided to allocate overhead based on direct labor hours (DLH). The standard variable OH rate per DLH is $0.80 (see introduction page), and actual variable overhead for the month was$1,395 for 2,325 actual direct labor hours giving an actual rate of $0.60. Let’s compute the variable overhead cost variance: • Actual rate per DLH was$0.60
• Standard rate per DLH was $0.80 • Actual DLH = 2,325 (AC – SC) * AQ = ($0.60 – $0.80) * 2,325 = (-$0.20) * 2,325 = -$465.00 The variable overhead cost variance was a negative 465. Alternatively: (AC * AQ) – (SC * AQ) = ($0.6 * 2,325) – ($0.8 * 2,325) =$1,395 – $1,860 = -$465.00

The variance is negative because actual variable overhead costs were $1,395, but if the company had actually incurred the expected amount of variable overhead costs at$0.80 per unit, total VOH would have been \$1,860. It’s possible that supplies are going down in price. Remember, we have isolated price from volume here. Theoretically, the reduction in cost is not due to employees using less material. That will be reflected in the efficiency variance.

Before we take a look at the variable overhead efficiency variance, let’s check your understanding of the cost variance.