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## Definition and Explanation:

Variable overhead efficiency variance is the difference between budget allowance based on actual hours worked and budget allowance based on standard hours allowed.

If the budget allowance based on actual hours worked is more than the budget allowance based on standard hours allowed, an unfavorable variable overhead efficiency variance occurs.

If the budget allowance based on actual hours worked is less than the budget allowance based on standard hours allowed, a favorable variable overhead efficiency variance occurs.

Variable overhead efficiency variance is calculated when overall or net overhead variance is further analyzed using four variance method. Other three variances that are calculated in four variance method are overhead spending variance, fixed overhead efficiency variance and overhead idle capacity variance.

## Formula:

Following formula is used for the calculation of this variance:

 Variable overhead efficiency variance = Budget allowance based on actual hours worked - Budget allowance based on standard hours allowed

## Example:

From the following data calculate variable 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:

 Budget allowance based on actual hours worked: Budgeted fixed expenses 3.200 Budgeted variable expenses (3,475 actual hours × \$1.20 standard variable rate) 4,170 7370 Budget allowance based on standard hours allowed: Budgeted fixed expenses 3,200 Budgeted variable expenses (3,400* actual hours × \$1.20 standard variable rate) 4,080 7,280 Variable overhead efficiency variance (Unfavorable) \$90 unfav *850 × 4 = 3,400

When variable overhead efficiency variance and fixed overhead efficiency variance are combined, they equal the overhead efficiency variance.

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