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 .
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