{"id":116,"date":"2021-01-26T22:08:57","date_gmt":"2021-01-26T22:08:57","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/?post_type=chapter&#038;p=116"},"modified":"2022-01-14T23:05:17","modified_gmt":"2022-01-14T23:05:17","slug":"variable-manufacturing-cost-variance","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/chapter\/variable-manufacturing-cost-variance\/","title":{"raw":"Variable Manufacturing Overhead Cost Variance","rendered":"Variable Manufacturing Overhead Cost Variance"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Compute variable manufacturing overhead cost variance<\/li>\r\n<\/ul>\r\n<\/div>\r\n<img class=\"size-medium wp-image-1604 alignleft\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/13000431\/russn_fckr-krV5aS4jDjA-unsplash-300x169.jpg\" alt=\"Many different paint cans\" width=\"300\" height=\"169\" \/>Although various complex computations can be made for overhead variances, we use a simple approach in this text. In this approach, known as the <strong>two-variance approach<\/strong> to variable overhead variances, we calculate only two variances\u2014a variable overhead cost variance and a variable overhead efficiency variance.\r\n\r\nThe <strong>variable overhead cost variance<\/strong> 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.)\r\n\r\nThe variable overhead cost variance is the difference between actual cost (AC) and standard cost allowed (SC) multiplied by the actual quantity of <span style=\"text-decoration: underline;\">direct labor hours<\/span> (AQ). In equation form, the variable overhead cost variance can be done in two ways:\r\n<ul>\r\n \t<li>Variable overhead cost variance = <strong>(Actual Cost \u2013 Standard Cost) x Actual Quantity<\/strong><\/li>\r\n<\/ul>\r\nOR\r\n<ul>\r\n \t<li><b>(Actual Cost x Actual Quantity) \u2013 (Standard Cost x Actual Quantity)<\/b><\/li>\r\n<\/ul>\r\nIn other words:\r\n<ul>\r\n \t<li><b>Variable OH Cost Variance = (Actual Variable OH per base \u2013 Std Variable OH per base) x Actual OH base\u00a0<\/b><\/li>\r\n<\/ul>\r\nOR\r\n<ul>\r\n \t<li><b>Variable OH Cost Variance = (Actual OH base x Actual Variable OH per base) \u2013 (Actual OH base x Std Variable OH per base)<\/b><\/li>\r\n<\/ul>\r\nBoulevard 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.\r\n\r\nLet\u2019s compute the variable overhead cost variance:\r\n<ul>\r\n \t<li>Actual rate per DLH was $0.60<\/li>\r\n \t<li>Standard rate per DLH was $0.80<\/li>\r\n \t<li>Actual DLH = 2,325<\/li>\r\n<\/ul>\r\n<p style=\"padding-left: 30px;\">(AC - SC) * AQ = ($0.60 - $0.80) * 2,325 = (-$0.20) * 2,325 = -$465.00<\/p>\r\nThe variable overhead cost variance was a negative 465.\r\n\r\nAlternatively:\r\n<p style=\"padding-left: 30px;\">(AC * AQ) - (SC * AQ) = ($0.6 * 2,325) - ($0.8 * 2,325) = $1,395 - $1,860 = -$465.00<\/p>\r\nThe 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\u2019s 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.\r\n\r\nBefore we take a look at the variable overhead efficiency variance, let\u2019s check your understanding of the cost variance.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\n[ohm_question hide_question_numbers=1]217939[\/ohm_question]\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Compute variable manufacturing overhead cost variance<\/li>\n<\/ul>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"size-medium wp-image-1604 alignleft\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5469\/2021\/01\/13000431\/russn_fckr-krV5aS4jDjA-unsplash-300x169.jpg\" alt=\"Many different paint cans\" width=\"300\" height=\"169\" \/>Although various complex computations can be made for overhead variances, we use a simple approach in this text. In this approach, known as the <strong>two-variance approach<\/strong> to variable overhead variances, we calculate only two variances\u2014a variable overhead cost variance and a variable overhead efficiency variance.<\/p>\n<p>The <strong>variable overhead cost variance<\/strong> 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.)<\/p>\n<p>The variable overhead cost variance is the difference between actual cost (AC) and standard cost allowed (SC) multiplied by the actual quantity of <span style=\"text-decoration: underline;\">direct labor hours<\/span> (AQ). In equation form, the variable overhead cost variance can be done in two ways:<\/p>\n<ul>\n<li>Variable overhead cost variance = <strong>(Actual Cost \u2013 Standard Cost) x Actual Quantity<\/strong><\/li>\n<\/ul>\n<p>OR<\/p>\n<ul>\n<li><b>(Actual Cost x Actual Quantity) \u2013 (Standard Cost x Actual Quantity)<\/b><\/li>\n<\/ul>\n<p>In other words:<\/p>\n<ul>\n<li><b>Variable OH Cost Variance = (Actual Variable OH per base \u2013 Std Variable OH per base) x Actual OH base\u00a0<\/b><\/li>\n<\/ul>\n<p>OR<\/p>\n<ul>\n<li><b>Variable OH Cost Variance = (Actual OH base x Actual Variable OH per base) \u2013 (Actual OH base x Std Variable OH per base)<\/b><\/li>\n<\/ul>\n<p>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.<\/p>\n<p>Let\u2019s compute the variable overhead cost variance:<\/p>\n<ul>\n<li>Actual rate per DLH was $0.60<\/li>\n<li>Standard rate per DLH was $0.80<\/li>\n<li>Actual DLH = 2,325<\/li>\n<\/ul>\n<p style=\"padding-left: 30px;\">(AC &#8211; SC) * AQ = ($0.60 &#8211; $0.80) * 2,325 = (-$0.20) * 2,325 = -$465.00<\/p>\n<p>The variable overhead cost variance was a negative 465.<\/p>\n<p>Alternatively:<\/p>\n<p style=\"padding-left: 30px;\">(AC * AQ) &#8211; (SC * AQ) = ($0.6 * 2,325) &#8211; ($0.8 * 2,325) = $1,395 &#8211; $1,860 = -$465.00<\/p>\n<p>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\u2019s 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.<\/p>\n<p>Before we take a look at the variable overhead efficiency variance, let\u2019s check your understanding of the cost variance.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p><iframe loading=\"lazy\" id=\"ohm217939\" class=\"resizable\" src=\"https:\/\/ohm.lumenlearning.com\/multiembedq.php?id=217939&theme=oea&iframe_resize_id=ohm217939\" width=\"100%\" height=\"150\"><\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-116\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Variable Manufacturing Overhead Cost Variance. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Accounting Principles: A Business Perspective. <strong>Authored by<\/strong>: James Don Edwards, University of Georgia &amp; Roger H. Hermanson, Georgie State University. <strong>Provided by<\/strong>: Endeavour International Corporation. <strong>Project<\/strong>: The Global Text Project. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><li>Many different paint cans. <strong>Provided by<\/strong>: Unsplash. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/unsplash.com\/photos\/krV5aS4jDjA\">https:\/\/unsplash.com\/photos\/krV5aS4jDjA<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/cc0\">CC0: No Rights Reserved<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":364389,"menu_order":12,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Variable Manufacturing Overhead Cost Variance\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Accounting Principles: A Business Perspective\",\"author\":\"James Don Edwards, University of Georgia & Roger H. Hermanson, Georgie State University\",\"organization\":\"Endeavour International Corporation\",\"url\":\"\",\"project\":\"The Global Text Project\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Many different paint cans\",\"author\":\"\",\"organization\":\"Unsplash\",\"url\":\"https:\/\/unsplash.com\/photos\/krV5aS4jDjA\",\"project\":\"\",\"license\":\"cc0\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-116","chapter","type-chapter","status-publish","hentry"],"part":25,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/116","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/users\/364389"}],"version-history":[{"count":11,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/116\/revisions"}],"predecessor-version":[{"id":2680,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/116\/revisions\/2680"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/parts\/25"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapters\/116\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/media?parent=116"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=116"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/contributor?post=116"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-managerialaccounting\/wp-json\/wp\/v2\/license?post=116"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}