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## 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 .

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