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Home Standard Costing and Variance Analysis Overhead Idle Capacity Variance
 
 

Overhead Idle Capacity Variance:

Definition and Explanation:

Overhead Idle capacity variance is the difference between the budget allowance based on actual hours worked and actual hours worked multiplied by the standard overhead rate.

Overhead idle capacity 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 efficiency variance.

Formula:

Following formula is used for the calculation of this variance:

Idle capacity variance = Budgeted allowance based on actual hours worked - (Actual hours worked Standard overhead rate)

Example:

From the following data calculate factory overhead idle capacity 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:

Budgeted allowance based on actual hours worked:    
   Fixed expenses budgeted $3,200  
   Variable expenses (3,475 actual hours worked $1.20 variable overhead rate) 4,170 $7,370
 
 
Actual hours worked at standard rate  (3,475 actual hours $2.00 standard rate)   $6,950
   
Idle capacity variance (Unfavorable)   $420 unfav
   

This variance consists of fixed expense only and can also be computed as follows:

(4,000 normal capacity - 3,475 actual hours) $0.80 fixed expenses rate = $420

This variance indicates the amount of overhead that is either under or over absorbed because actual hours are either less or more than the hours on which the overhead rate was based. In the above example the plant is operated at 86.875% (3,475/4,000) of normal capacity based on actual hours.

Who is Responsible For Idle Capacity Variance?

This variance is the responsibility of executive management .

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
----------------------------------------------------------------------------
  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
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  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
----------------------------------------------------------------------------
  Standard Costing and Variance Analysis
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  Balanced Scorecard
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  Capital Investment Analysis/Capital Budgeting
 

 

 

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