Home page               Download material                Accounting topics                Accounting dictionary                Financial calculators

Home » Standard Costing and Variance Analysis » Variable Overhead Efficiency Variance
 
 

Variable Overhead Efficiency Variance:

Definition and Explanation:

Variable overhead efficiency variance is the difference between budget allowance based on actual hours worked and budget allowance based on standard hours allowed.

If the budget allowance based on actual hours worked is more than the budget allowance based on standard hours allowed, an unfavorable variable overhead efficiency variance occurs.

If the budget allowance based on actual hours worked is less than the budget allowance based on standard hours allowed, a favorable variable overhead efficiency variance occurs.

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

Formula:

Following formula is used for the calculation of this variance:

Variable overhead efficiency variance = Budget allowance based on actual hours worked - Budget allowance based on standard hours allowed

Example:

From the following data calculate variable 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:

Budget allowance based on actual hours worked:    
  Budgeted fixed expenses 3.200  
  Budgeted variable expenses (3,475 actual hours × $1.20 standard variable rate) 4,170 7370
 
 
Budget allowance based on standard hours allowed:    
  Budgeted fixed expenses 3,200  
  Budgeted variable expenses (3,400* actual hours × $1.20 standard variable rate) 4,080 7,280
 

Variable overhead efficiency variance (Unfavorable)    $90 unfav
   
*850 × 4 = 3,400    

When variable overhead efficiency variance and fixed overhead efficiency variance are combined, they equal the overhead efficiency variance.

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