Variable Overhead Efficiency Variance
Variable overhead efficiency variance is the product of standard variable overhead rate and the difference between the standard units allowed of the variable overhead application base and actual units used of the variable overhead application base. Assuming that variable overhead application base is direct labor hours, the formula to calculate variable overhead efficiency variance will be:
|VOH Efficiency Variance = ( SH − AH ) × SR|
SH are standard direct labor hours allowed
AH are the actual direct labor hours
SR is the standard variable overhead rate
The standard direct labor hours allowed (SH) in the above formula is calculated by multiplying standard direct labor hours per unit and actual units produced.
As the name suggests, variable overhead efficiency variance measure the efficiency of production department in converting inputs to outputs. Variable overhead efficiency variance is positive when standard hours allowed exceed actual hours. Therefore a positive value is favorable implying that production process was carried out efficiently with minimal loss of resources.
On the other hand when actual hours exceed standard hours allowed, the variance is negative and unfavorable implying that production process was inefficient.
Calculate the variable overhead efficiency variance using the following figures:
|Number of Units Produced||620|
|Standard Direct Labor Hours Per Unit||0.2|
|Actual Direct Labor Hours Used||130|
|Standard Variable Overhead Rate||$9.40|
|Actual Units Produced||620|
|× Standard Direct Labor Hours Per Unit||0.2|
|Standard Direct Labor Hours Allowed||124|
|Standard Hours Allowed||124|
|− Actual Hours Used||130|
|× Standard Variable Overhead Rate||$9.4|
|Direct Labor Efficiency Variance||− $56.4|
The variance calculated above is negative and thus unfavorable.
Written by Irfanullah Jan