Variable Overhead Efficiency Variance Formula

Variable Overhead Efficiency Variance Formula

Variable overheads efficiency variance formula has been shown below. Variable overheads efficiency variance formula has been explained with an example.

Variable overhead efficiency = Standard Rate x (Standard Hr-Actual Hr)

it is important to note that variable overhead efficiency variance focuses on the production timing (time taken in production against time expected to be taken).

Variable Overhead Efficiency Variance Example

Standard rate = $ 12

Standard Hr = 10 Hr per unit

Unit produced= 20,000

Actual Hr = 210,000

Solution

Standard hour = units produced x Hr taken per unit

=20,000 x 10

=200,000 Hr

Variable overhead efficiency = Standard Rate x (Standard Hour-Actual Hour)

= 12 x (200,000-210,000)

= 12 x -10,000

=-120,000 (adverse Variable overhead efficiency variance).

Favorable and adverse Variable Overhead Efficiency Variance

When actual hour taken in the process of production are less than standard hour, then it is a favorable situation and technically called favorable efficiency variance. On other hand, when actual hour taken in the process of production are more than standard hour, then this is adverse efficiency variance case.

Reasons of Favorable Variable Overheads Efficiency Variance

First reason of favorable efficiency reason may be use of modern technology. Similarly skilled labour may be other important reasons for favorable efficiency variance. Training of employee may also result in favorable efficiency variance due to improvement in efficiency of indirect labour.

Skilled labour, trained employees and improved quality material shall reduce the production timing (efficiency). when such time saving is reflected in standard rate , it is called Favorable Variable overhead efficiency variance.

Reasons for Adverse Variable Overhead Efficiency Variance

Reasons for adverse efficiency variance include the use of unskilled labour. Other reason for adverse variable efficiency variance may be use of outdated or old production method. Use of low quality material may also result in negative variable efficiency variance.

unskilled labour is supposed to take more time and thus actual hour of production are expected to increase , similarly old methods of production would also consume more time in production. poor quality material is not easy to handle during the production.

Limitation of Variable overhead Efficiency

Variable overhead are first accumulated and then divided by the appropriate hour (labour hour or machine hours). It is pertinent to mention that using one standard hour bases does not reflect the variable overheads, because variable overhead are independent of labour or machine hours.

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