Overhead Efficiency Variance

Definition

Overhead efficiency variance is a measure of the difference between the actual overhead costs incurred and the standard overhead costs expected for the level of activity achieved. It is used to evaluate the efficiency of overhead resource utilization in a standard costing system.

5 Must Know Facts For Your Next Test

1. Overhead efficiency variance is a key performance indicator for evaluating the management of overhead costs in a standard costing system.
2. A favorable overhead efficiency variance indicates that the actual overhead costs were less than the standard overhead costs, suggesting efficient utilization of overhead resources.
3. An unfavorable overhead efficiency variance indicates that the actual overhead costs were higher than the standard overhead costs, suggesting inefficient utilization of overhead resources.
4. Overhead efficiency variance is influenced by factors such as the accuracy of the standard overhead cost estimates, the level of activity achieved, and the efficiency of overhead resource usage.
5. Analyzing and understanding the causes of overhead efficiency variance can help managers identify opportunities for cost reduction and process improvement.

Review Questions

• Explain how overhead efficiency variance is calculated and its significance in a standard costing system.
  • Overhead efficiency variance is calculated as the difference between the actual overhead costs incurred and the standard overhead costs expected for the level of activity achieved. A favorable variance indicates that the actual overhead costs were less than the standard, suggesting efficient utilization of overhead resources. An unfavorable variance indicates that the actual overhead costs were higher than the standard, suggesting inefficient utilization. Analyzing the overhead efficiency variance helps managers identify opportunities for cost reduction and process improvement.
• Describe the factors that can influence the overhead efficiency variance and how managers can use this information to improve the management of overhead costs.
  • The accuracy of the standard overhead cost estimates, the level of activity achieved, and the efficiency of overhead resource usage are key factors that can influence the overhead efficiency variance. Managers can use this information to identify areas where overhead resources are being underutilized or inefficiently used, and then implement strategies to improve the management of overhead costs. This may involve adjusting the standard overhead cost estimates, optimizing the allocation of overhead resources, or implementing process improvements to enhance the efficiency of overhead activities.
• Analyze how the overhead efficiency variance relates to the development of standard costs and the evaluation of overhead cost management in a standard costing system.
  • The overhead efficiency variance is directly tied to the development of standard costs and the evaluation of overhead cost management in a standard costing system. The accuracy and appropriateness of the standard overhead cost estimates are crucial, as they serve as the benchmark for measuring efficiency. By analyzing the overhead efficiency variance, managers can assess the effectiveness of their overhead cost management strategies, identify areas for improvement, and make informed decisions to enhance the overall efficiency of the organization's operations. This feedback loop between standard cost development and overhead efficiency variance analysis is essential for continuous improvement in a standard costing system.

Related terms

Standard Overhead Cost: The predetermined overhead cost that should have been incurred for the actual level of activity achieved, based on established standards.

Actual Overhead Cost: The total overhead costs actually incurred during a given period, regardless of the level of activity.

Activity Level: The measure of the volume of production or service output, such as machine hours, direct labor hours, or units produced.