Variable overhead efficiency variance

Definition

Variable overhead efficiency variance measures the difference between the standard variable overhead cost allocated for the actual hours worked and the standard variable overhead cost allowed for the actual production achieved. It helps in assessing the efficiency in utilizing labor hours related to variable overheads.

5 Must Know Facts For Your Next Test

1. It is calculated as (Actual Hours - Standard Hours) x Standard Variable Overhead Rate.
2. A favorable variance indicates efficient use of labor hours, resulting in lower overhead costs.
3. An unfavorable variance suggests inefficiency, leading to higher than expected variable overhead costs.
4. This variance specifically pertains to variable costs that fluctuate with changes in production levels.
5. It is a key component of total variable manufacturing overhead variance analysis.

Review Questions

• How do you calculate the variable overhead efficiency variance?
• What does a favorable variable overhead efficiency variance indicate?
• What impact does an unfavorable variable overhead efficiency variance have on costs?

Related terms

Standard Hours: The number of labor hours that should have been worked for the output achieved, based on standard rates.

Variable Overhead Spending Variance: The difference between actual and budgeted variable overhead costs based on actual activity.

Fixed Overhead Volume Variance: A measure of under- or over-applied fixed overhead due to differences between budgeted and actual production levels.