Overhead Efficiency
Variance:
Definition and Explanation:
Overhead efficiency variance is the difference
between the actual hours worked at standard rate and
overhead charged to production (standard hours
allowed at standard rate).
If the
actual hours worked at standard rate is more than
the overhead charged to production an unfavorable
efficiency variance occurs.
If the
actual hours worked at standard rate is less than
the overhead charged to production a favorable
efficiency variance occurs.
Overhead efficiency variance is calculated when
overall or net overhead variance is further
analyzed using three variance method. Other two
variances that are calculated in three variance
method are overhead spending variance and overhead
idle capacity variance.
Formula:
Following formula is used for the calculation of
this variance:
efficiency
variance = (Actual hours worked
×
Standard overhead rate)  Overhead charged
to production 
Example:
From the following
data calculate factory overhead efficiency
variance:
Actual
overhead 

$7,384 
Actual
hours worked 

3,475 
Units
produced during the period 

850 
Standard hours for one unit 

4 
Standard factory overhead rate: 


Variable 
$1.20 

Fixed 
$0.80 
$2.00 



Normal
Capacity in labor hours 

4000 hours 
Solution:
Actual
hours worked at standard rate
(3,475 actual hours × $2.00 standard
rate) 

$6,950 
Overhead
charged to production (3400*
× $2.00 standard overhead rate) 

6,800 



Efficiency
variance (Unfavorable) 

$150 unfav 



*850
× 4 = 3,400 


This variance
consists of fixed expense only and can also be
computed as follows:
(3,475 actual hours  3,400 standard hours)
×
$2.00 standard overhead rate
=
$150 unfavorable
This variance
consists fixed and variable expenses and results
when actual hours used are more or less than
standard hours allowed. When labor hours are the
basis for applying factory overhead, this variance
and its cause reflect the effect of the
labor efficiency variance on factory overhead.
When machine hours are the basis, the variance
relates to efficiency of machine usage.
Who is Responsible For Efficiency Variance?
This variance is
the responsibility of department management, and is
caused by inefficiencies, inexperienced labor,
changes in operations, new tools, and different
types of materials. Relevant
Articles:
