Variable overhead efficiency variance

Variable overhead efficiency variance quantifies the effect of a change in manufacturing efficiency on variable production overheads. Depending on the automation of the production process it may be expressed in terms of labor hours or machine hours. The basic formula is:

Variable overhead efficiency variance = Standard overhead rate x (Actual hours - Standard hours)

The variable overhead efficiency variance uses data from production and from predictions in order to find difference. If the favorable variance is encountered it can mean that:

  • easier to work raw materials were used,
  • employees have higher competences,
  • more efficient machines were used,
  • the plans were prepared badly.

The last is the case in most situations when we are surprised by the results.

References

  • Horngren, C. T., Bhimani, A., Datar, S. M., Foster, G., & Horngren, C. T. (2002). Management and cost accounting. Harlow: Financial Times/Prentice Hall.
At work.png

This is an article stub.
If you are able to help improve this article, please feel free to edit it.