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:

Example:

From the following data calculate factory overhead efficiency variance:

Solution:

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.

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