Variable overhead efficiency variance

From CEOpedia | Management online
Variable overhead efficiency variance
See also

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.


Author: Olha Slyuzar