Variable overhead efficiency variance

Variable overhead efficiency variance - is the difference, among certain variable overhead set up on actual time taken to produce a product, and standard variable overhead set up on the time planned for producing that product.

The reason why it is happening, is that there are differences of productive efficiency.

As an illustration to that, may be the cardinally difference between the quantity of labor hours, planned to produce a determinate quantity of goods and the quantity of hours, which is required due to standard or budget, to produce the same quantity of goods.

Variable overhead efficiency variance is one of the two segments of total variable overhead variance. The second segment is named variable overhead spending variance ( D. Hansen., M. Mowen, L. Guan 2007, pp. 310-311).

The formula for counting variable overhead efficiency variance

$(RH-SH)\cdot SR$

where (C. Drury 2015, p. 744):

• RH - quantity of real hours needed to produce some quantity of goods,
• SH - quantity of standard hours mentioned in budget for producing the same quantity of goods,
• SR - accepted variable manufacturing overhead rate.

Representation of how to count variable overhead efficiency variance

For example, one manufacture is producing devices. The rate for standard variable overhead to count unintended labor cost, is appraisal on level 20 dollars per hour at this production. The quantity of hours required due to standard procedure is 2000 hours with result of 1000 produced devices during that time.

Moreover, the actual time needed to produce 1000 of items obtained 2200 hours. In conclusion to this case should be mentioned that the variance is negative due to real time was higher than it was supposed to be due to forecast in budget.

Also, the way to count variable overhead efficiency variance in this case is $(2200-2000)\cdot 20=4000$.

What is variable overhead spending variance?

Variable overhead spending variance - is the difference, among certain variable overhead set up cost for the unintended material required for producing the goods, and standard variable overhead set up on the cost noted in the budget.

The main excuse why variable overhead spending variance takes place, is that there are differences inserted in costs of the unintended material in comparison to planned in budget cost of the same material.

Every case when variable overhead spending variance appears may be positive or negative for the company. The positive case occurs when exact cost of unintended materials such as paint, oil, grease is minor in comparison to standard variable overhead. The negative scenario comes about when exact cost is over cost noted in a budget (D. Hansen, M. Mowen 2002 p. 398).

Representation of how to count variable overhead spending variance

For instance to that may be the a manufacture, which produces some goods, with using oil in the process. In budget the cost of that oil is on level 5000 dollars, when the real time cost of that material is 1000 dollars. Accordingly, to that, the variable overhead spending variance is having a positive scenario, because actual indirect oil cost is less than the forecast in budget was for it.

Examples of Variable overhead efficiency variance

• Direct labor rate variance - This is the variance that arises when the actual rate of labor used in the production process differs from the standard rate for that labor. For example, if a company hires a new worker at a rate of $20 an hour, but the standard rate for the job is $15 an hour, then the difference of $5 an hour is the direct labor rate variance.
• Variable overhead spending variance - This is the variance that arises when the actual variable overhead costs incurred during the production process exceed the standard variable overhead costs. For example, if a company spends $2,000 on variable overhead costs in a given month, but the standard variable overhead costs are expected to be $1,800, then the difference of $200 is the variable overhead spending variance.
• Variable overhead efficiency variance - This is the variance that arises when the actual time taken to produce a product differs from the standard time for that product. For example, if a company takes 10 hours to produce a product, but the standard time for that product is 8 hours, then the difference of 2 hours is the variable overhead efficiency variance.

Advantages of Variable overhead efficiency variance

The advantages of variable overhead efficiency variance include:

• Improved budgeting and forecasting accuracy, as it allows for the calculation of the expected overhead costs and helps to ensure that the budget is aligned with actual performance.
• Improved decision-making, as it allows managers to identify areas where costs can be reduced or processes can be improved in order to increase efficiency and reduce costs.
• Improved cost control, as it helps to identify areas where costs are higher than expected and can be addressed in order to reduce costs.
• Increased motivation of employees, as it allows them to see their individual contribution to the overall efficiency of the business and rewards them for their efforts.
• Improved resource allocation, as it allows managers to make data-driven decisions about where resources should be allocated to achieve the best results.

Limitations of Variable overhead efficiency variance

• The variable overhead efficiency variance does not take into account the fixed costs associated with production, as it only looks at the variable costs.
• This variance also does not take into account any changes in the price of the inputs used in production.
• It is also not able to capture any other inefficiencies such as quality issues or any other type of waste.
• The variable overhead efficiency variance does not reflect any changes in the market conditions that could have an impact on the cost of production.
• This variance does not take into account any changes in the production process that could have an impact on the cost of production.
• It does not consider any non-quantifiable factors such as employee morale and motivation, which can also have an impact on the cost of production.

Other approaches related to Variable overhead efficiency variance

A Variable overhead efficiency variance can be calculated in a number of ways. These include:

• The fixed overhead budget variance: This is the difference between the expected and actual fixed overhead costs.
• The variable overhead spending variance: This is the difference between the planned and actual variable overhead costs.
• The variable overhead efficiency variance: This is the difference between the actual time taken to produce a product and the standard time planned for producing the product.
• The overhead cost per unit variance: This is the difference between the actual overhead costs per unit and the standard overhead costs per unit.

In summary, there are several methods for calculating a Variable overhead efficiency variance, each of which focuses on different aspects of overhead costs and productivity.

Variable overhead efficiency variance — recommended articles

Direct labor efficiency variance — Differential costing — Productivity report — Step cost — Direct labor cost — Direct expense — Weighted average method — Cost variance — Manufacturing cost

References

• Drury C. (2015). Management and Cost Accounting , Cengage Learning EMEA; 9th edition, p.744.
• Hansen D., Mowen M., Guan L. (2007). Cost Management: Accounting and control South-Western College Pub; 6 edition, pp. 310-311.
• Hansen D., Mowen M. (2002). Cost Management: Accounting and Control , South-Western College/West; 4 edition, p. 398.

Author: Olha Slyuzar