  Download material                Accounting topics                Accounting dictionary                Financial calculators Home » Standard Costing and Variance Analysis » Overhead Efficiency Variance

# Overhead Efficiency Variance:

## Definition and Explanation:

Overhead efficiency variance is the difference between the actual hours worked at standard rate and overhead charged to production (standard hours allowed at standard rate).

If the actual hours worked at standard rate is more than the overhead charged to production an unfavorable efficiency variance occurs.

If the actual hours worked at standard rate is less than the overhead charged to production a favorable efficiency variance occurs.

Overhead efficiency variance is calculated when overall or net overhead variance is further analyzed using three variance method. Other two variances that are calculated in three variance method are overhead spending variance and overhead idle capacity variance.

## Formula:

Following formula is used for the calculation of this variance:

 efficiency variance = (Actual hours worked × Standard overhead rate) - Overhead charged to production

## Example:

From the following data calculate factory overhead efficiency variance:

 Actual overhead \$7,384 Actual hours worked 3,475 Units produced during the period 850 Standard hours for one unit 4 Standard factory overhead rate: Variable \$1.20 Fixed \$0.80 \$2.00 Normal Capacity in labor hours 4000 hours

### Solution:

 Actual hours worked at standard rate  (3,475 actual hours × \$2.00 standard rate) \$6,950 Overhead charged to production (3400* × \$2.00 standard overhead rate) 6,800 Efficiency variance (Unfavorable) \$150 unfav *850 × 4 = 3,400

This variance consists of fixed expense only and can also be computed as follows:

(3,475 actual hours - 3,400 standard hours) × \$2.00 standard overhead rate

= \$150 unfavorable

This variance consists fixed and variable expenses and results when actual hours used are more or less than standard hours allowed. When labor hours are the basis for applying factory overhead, this variance and its cause reflect the effect of the labor efficiency variance on factory overhead. When machine hours are the basis, the variance relates to efficiency of machine usage.

## Who is Responsible For Efficiency Variance?

This variance is the responsibility of department management, and is caused by inefficiencies, inexperienced labor, changes in operations, new tools, and different types of materials.

## Relevant Articles:

 » Definition and Explanation of Standard Cost » Purposes and Advantages of Standard Costing System » Setting Standards » Materials Price Standard » Materials Price Variance » Materials Quantity Standard » Materials Quantity Variance » Direct Labor Rate Standard » Direct Labor Rate Variance » Direct Labor Efficiency Standard » Direct Labor Efficiency Variance » Factory Overhead Cost Standards » Overall or Net Factory Overhead Variance » Overhead Controllable Variance » Overhead Volume Variance » Overhead Spending Variance » Overhead Idle Capacity Variance » Overhead Efficiency Variance » Variable Overhead Efficiency Variance » Fixed Overhead Efficiency Variance » Mix and Yield Variance » Variance Analysis Example » Standard Costing and Variance Analysis Formulas » Management by Exception and Variance Analysis » International Uses of Standard Costing System » Advantages, Disadvantages, and Limitations of Standard Costing

A D V E R T I S E M E N T Home                         Download material                         Contact us                         Privacy policy                         Link to us                         Advertise Copyright © 2011 