The Parco Company applies manufacturing overhead costs to products on the basis of direct labor-hours. The standard cost card shows that 12 direct labor-hours are required per unit of product. For August, the company budgeted to work 360,000 direct labor-hours and to incur the following total manufacturing overhead costs:
| Total variable overhead costs | $396,000 |
| Total fixed overhead costs | $475,200 |
During August, the company completed 28,000 units of product, worked 344,000 direct labor-hours, and incurred the following total manufacturing overhead costs:
| Total variable overhead costs | $395,600 |
| Total fixed overhead costs | $461,200 |
The denominator activity in the predetermined overhead rate is 360,000 direct labor-hours. What is the variable overhead spending variance for August?
First, compute the variable overhead (VOH) rate as follows:
Budgeted variable overhead costs ÷ budgeted direct labor hours = VOH rate
$396,000 ÷ 360,000 direct labor hours = $1.10 per direct labor hour
Then, compute the spending variance as follows:
Actual VOH incurred – Flexible Budget for VOH Overhead at Actual hours
Or
Actual VOH incurred – (Actual direct labor hours x VOH rate per direct labor hour)
$395,600 – (344,000 hours x $1.10 per hour) = Spending variance
$395,600 – $378,400 = $17,200 U (see discussion below)
The variance is unfavorable because the actual overhead costs were more than the benchmark (that is, how much should have been spent in total on variable overhead items during the period).
