Variable overhead efficiency variance refers to the difference between the true time it takes to manufacture a product and the time budgeted for it, as well as the impact of that difference. It arises from variance in productive efficiency.
For example, the number of labor hours taken to manufacture a certain amount of product may differ significantly from the standard or budgeted number of hours. Variable overhead efficiency variance is one of the two components of total variable overhead variance, the other being variable overhead spending variance.
Understanding Variable Overhead Efficiency Variance
In numerical terms, variable overhead efficiency variance is defined as:
[
\text{VOEV} = ( \text{ALH} - \text{BLH} ) \times \text{Hourly Rate}
]
where:
- VOEV: Variable overhead efficiency variance
- ALH: Actual labor hours
- BLH: Budgeted labor hours
- Hourly Rate: Rate for standard variable overhead costs
The hourly rate in this formula includes indirect labor costs such as shop foreman and security. If actual labor hours are less than the budgeted or standard amount, the variable overhead efficiency variance is favorable; if actual labor hours are more than the budgeted or standard amount, the variance is unfavorable.
Practical Example of Variable Overhead Efficiency Variance
Consider an example of a widget-manufacturing plant, where the rate for standard variable overhead to account for indirect labor costs is estimated at $20 per hour. Assume that the standard number of hours required to manufacture 1,000 widgets is 2,000 hours. However, the company actually took 2,200 hours to manufacture 1,000 widgets.
Calculating Unfavorable Variance
- Standard Hours: 2,000
- Actual Hours: 2,200
- Hourly Rate: $20
Unfavorable Variable Overhead Efficiency Variance:
[ (2,200 - 2,000) \times 20 = 200 \times 20 = $4,000 ]
The variance is unfavorable because the company took more time than budgeted to produce the 1,000 widgets.
Calculating Favorable Variance
If the company had instead taken 1,900 hours to manufacture 1,000 widgets,
- Standard Hours: 2,000
- Actual Hours: 1,900
- Hourly Rate: $20
Favorable Variable Overhead Efficiency Variance:
[ (2,000 - 1,900) \times 20 = 100 \times 20 = $2,000 ]
Here, the variance would be favorable, meaning the company was more efficient than budgeted.
Related Terms: Overhead Spending Variance, Budget Variance, Standard Cost, Actual Cost, Labor Efficiency.
References
Get ready to put your knowledge to the test with this intriguing quiz!
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## What does Variable Overhead Efficiency Variance measure?
- [ ] The fixed costs incurred during production
- [x] The efficiency in using labor or machine hours compared to standards
- [ ] The quality of products produced
- [ ] The total variable costs of production
## What is the formula to calculate Variable Overhead Efficiency Variance?
- [ ] (Actual Hours × Standard Variable Overhead Rate) - (Budgeted Hours × Standard Rate)
- [ ] Actual Variable Overhead - Budgeted Variable Overhead
- [ ] Actual rate × (Actual Hours - Budgeted Hours)
- [x] (Actual Hours - Budgeted Hours) × Standard Variable Overhead Rate
## A favorable Variable Overhead Efficiency Variance indicates:
- [x] Efficient use of labor or machine hours
- [ ] Overspending on variable overheads
- [ ] Variance is higher than the budget
- [ ] Poor use of resources
## What can cause an unfavorable Variable Overhead Efficiency Variance?
- [ ] Lower production levels than expected
- [ ] High fixed costs
- [x] Longer labor hours than budgeted
- [ ] Favorable variance in material costs
## If the actual hours worked are less than the budgeted hours, the Variable Overhead Efficiency Variance will be:
- [x] Favorable
- [ ] Unfavorable
- [ ] Neutral
- [ ] Irrelevant
## Can improvements in production processes impact Variable Overhead Efficiency Variance?
- [x] Yes
- [ ] No
## Why is analyzing Variable Overhead Efficiency Variance important?
- [x] It helps in identifying the efficiency of resource use
- [ ] It shows the profits an organization has made
- [ ] It demonstrates fixed cost utilization
- [ ] It reflects total sales variance
## The standard variable overhead rate is $4 per machine hour. If the standard hours allowed for actual production were 300 hours but actual machine hours used were 320 hours, what is the Variable Overhead Efficiency Variance?
- [ ] $80 Favorable
- [ ] $80 Unfavorable
- [ ] $20 Favorable
- [x] $80 Unfavorable
## Variable Overhead Efficiency Variance is most relevant to which type of costing system?
- [ ] Direct costing
- [ ] Activity-based costing
- [ ] Absorption costing
- [x] Standard costing
## A positive Variable Overhead Efficiency Variance means:
- [ ] Variable costs exceeded budget
- [x] Less variable overhead than expected to achieve the level of output
- [ ] Machine breakdowns were frequent
- [ ] More labor hours were worked
