Variable Overhead Efficiency Variance (VOEV) is the difference or variance between the actual and standard number of hours to make a certain number of products. The standard hours are the hours we multiply with the overhead rate per hour to get the total variable overhead. We can say that VOEV is the difference between the actual variable manufacturing overhead and expected variable overhead if we have the number of hours worked. This variance arises because of productive efficiency.
We also call this variance a spending variance. This variance measures the production efficiency in converting inputs to outputs.
VOEV represents the production expense particulars that the production department submits. Moreover, it also represents projected labor hours to be worked. The projected hours are on the basis of estimates from the industrial engineering and production scheduling staff. The production staff considers efficiency and equipment capacity levels to come up with the projection.
Thus, it is possible that any error in the projection may result in a variance. So, it is important that when investigating the causes of variance, the management should review the validity of projections as well.
Variable Overhead Efficiency Variance – Formula
The formula to calculate Variable Overhead Efficiency Variance is as given below:
VOEV = Standard overhead rate * (Actual hours less Standard hours)
Like any other variance, this variance can also be favorable or adverse (unfavorable). A favorable VOEV is when the actual hours worked are less than standard hours. This means the company incurs less expense.
Note that a favorable VOEV does not necessarily mean that a firm incurs less actual overheads. Instead, it suggests an improvement in the allocation base.
Example of the Variable Overhead Efficiency Variance
Company A’s cost accounting staff, on the basis of historical and projected labor patterns, projects that the production team should work for 40,000 hours in a month and incur the variable overhead cost of $800,000 a month. This gives a variable overhead rate of $20 per hour. However, a month later, Company A buys a new machine that improves production efficiency. So, the number of hours drops to 38,000 a month.
Let us now put the values in the given formula to calculate VOEV.
VOEV = $20 (38,000 hours worked less 40,000 standard hours) = $40,000
This is a favorable variance because the actual hours are less than the standard hours.
Causes and Limitations
Following are the causes of a favorable variable overhead efficiency variance:
- There will be a favorable variance if a firm replaces a less efficient machine with a more efficient one.
- If a firm uses skilled and more efficient workers for production, it would also result in lesser time consumption and thus a favorable variance.
- If a firm has a performance-based remuneration system, then it may result in a favorable variance. Because the remuneration will be paid based on outcome and not on the basis of actual hours worked.
- Easy to handle raw materials leading to time savings, can also result in a favorable variance.
- If a firm buys a new machine that increases the production efficiency, then also favorable variance could occur.
- If the budget allocation is more than usual due to wrong calculation or estimation, then it may result in a favorable variance as well.
Following are the causes of unfavorable variance:
- Using low quality or unavailability of certain raw materials in time may result in unfavorable variance.
- Any drop in the efficiency of machines due to continuous use may lead to unfavorable variance.
- The unfavorable variance may also arise if a company employs less efficient employees.
- If the management makes any error in setting standards and budgets, then also there could be an adverse variance.
Advantages and Limitations of Variable Overhead Efficiency Variance
VOEV has the following advantages:
- Variable Overhead Efficiency Variance is a crucial component of total overhead variance, as well as OH expenditure variance.
- VOEV helps to identify any inefficiency in production.
- It inspires operation managers and laborers to strive for favorable variances.
- It assists managers in differentiating between labor and overhead deficiencies.
- VOEV assists management in bettering their internal standards, especially those who adopt TQM or JIT approach.
Like advantages, VOEV does have certain limitations also:
- It is possible that the production team makes some estimation errors in setting the budget.
- It could take too much time and effort to find the reason for the variance. This is because; the team needs to check all the accounts that may result in variance.
- If there is no threshold, then it could get difficult to determine whether or not the variance is significant.
- The type of costing method that a company uses can affect the overhead rate variance. This is because different costing methods will interpret variance differently. For instance, marginal costing will give a different number than the ABC method (Activity Based Costing).
The Variable Overhead Efficiency Variance is a crucial component of the total overhead variance. And it could prove an important tool for measuring performance, especially for the companies utilizing the marginal costing approach. For instance, management can use this variance to determine how efficiently the production team is using the resources, and if they are meeting the standard hour targets or not.
However, one should interpret this variance in combination with fixed and variable overhead expenditure variances. Moreover, one should also consider other factors, such as machine hours and labor hours, when analyzing this variance.
Visit Variable Overhead Cost Variance for other types of variable overhead variances.
Frequently Asked Questions (FAQs)
Following is the formula to calculate the Variable Overhead Efficiency Variance:
VOEV = Standard overhead rate * (Actual hours less Standard hours)
Variable Overhead Efficiency Variance (VOEV) is the difference or variance between the actual and standard number of hours to make a certain number of products. The standard hours are the hours that we multiply with the overhead rate per hour, to get the total variable overhead.
Following are the causes of variable overhead efficiency variance:
1. Replacing a less efficient machine with a more efficient one.
2. Employing skilled and more efficient workers for production.
3. Performance-based remuneration system.
4. Low quality or unavailability of certain raw materials.
5. Any drop in the efficiency of machines due to continuous use.
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