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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:

Definition and Explanation of Standard Cost
Purposes and Advantages of Standard Costing System
Setting Standards
Materials Price Standard
Materials Price Variance
Materials Quantity Standard
Materials Quantity Variance
Direct Labor Rate Standard
Direct Labor Rate Variance
Direct Labor Efficiency Standard
Direct Labor Efficiency Variance
Factory Overhead Cost Standards
Overall or Net Factory Overhead Variance
Overhead Controllable Variance
Overhead Volume Variance
Overhead Spending Variance
Overhead Idle Capacity Variance
Overhead Efficiency Variance
Variable Overhead Efficiency Variance

Fixed Overhead Efficiency Variance

Mix and Yield Variance
Variance Analysis Example
Standard Costing and Variance Analysis Formulas
Management by Exception and Variance Analysis
International Uses of Standard Costing System
Advantages, Disadvantages, and Limitations of Standard Costing

 

 

A D V E R T I S E M E N T

 

Financial Accounting Topics


  Introduction to Accounting
 ----------------------------------------------------------------------------
  Transactions and Accounting Equation
----------------------------------------------------------------------------
  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
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  Capital and Revenue Items
----------------------------------------------------------------------------
  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
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  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
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  Variable Costing System
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  Materials and Inventory Cost Control
----------------------------------------------------------------------------
  Activity Based Costing System
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  Standard Costing and Variance Analysis
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  Balanced Scorecard
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  Capital Investment Analysis/Capital Budgeting
 

 

 

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