Variable Overhead Efficiency Variance
Variable overhead efficiency variance refers to the difference between the true time it takes to manufacture a product and the time budgeted for it, as well as the impact of that difference. In numerical terms, variable overhead efficiency variance is defined as: VOEV \= ( ALH − BLH ) × Hourly Rate where: VOEV \= Variable overhead efficiency variance ALH \= Actual labor hours BLH \= Budgeted labor hours Hourly Rate \= Rate for standard variable overhead \\begin{aligned} &\\text{VOEV} = ( \\text{ALH} - \\text{BLH} ) \\times \\text{Hourly Rate} \\\\ &\\textbf{where:} \\\\ &\\text{VOEV} = \\text{Variable overhead efficiency variance} \\\\ &\\text{ALH} = \\text{Actual labor hours} \\\\ &\\text{BLH} = \\text{Budgeted labor hours} \\\\ &\\text{Hourly Rate} = \\text{Rate for standard variable overhead} \\\\ \\end{aligned} VOEV\=(ALH−BLH)×Hourly Ratewhere:VOEV\=Variable overhead efficiency varianceALH\=Actual labor hoursBLH\=Budgeted labor hoursHourly Rate\=Rate for standard variable overhead If actual labor hours are less than the budgeted or standard amount, the variable overhead efficiency variance is favorable; if actual labor hours are more than the budgeted or standard amount, the variance is unfavorable. Variable overhead efficiency variance is one of the two components of total variable overhead variance, the other being variable overhead spending variance. In this case, the unfavorable variable overhead efficiency variance is (2,200 – 2,000) x $20 = $4,000; the variance is unfavorable because the company took more time than budgeted to produce the 1,000 widgets.
What Is Variable Overhead Efficiency Variance
Variable overhead efficiency variance refers to the difference between the true time it takes to manufacture a product and the time budgeted for it, as well as the impact of that difference. It arises from variance in productive efficiency.
For example, the number of labor hours taken to manufacture a certain amount of product may differ significantly from the standard or budgeted number of hours. Variable overhead efficiency variance is one of the two components of total variable overhead variance, the other being variable overhead spending variance.
Understanding Variable Overhead Efficiency Variance
In numerical terms, variable overhead efficiency variance is defined as:
VOEV = ( ALH − BLH ) × Hourly Rate where: VOEV = Variable overhead efficiency variance ALH = Actual labor hours BLH = Budgeted labor hours Hourly Rate = Rate for standard variable overhead \begin{aligned} &\text{VOEV} = ( \text{ALH} - \text{BLH} ) \times \text{Hourly Rate} \\ &\textbf{where:} \\ &\text{VOEV} = \text{Variable overhead efficiency variance} \\ &\text{ALH} = \text{Actual labor hours} \\ &\text{BLH} = \text{Budgeted labor hours} \\ &\text{Hourly Rate} = \text{Rate for standard variable overhead} \\ \end{aligned} VOEV=(ALH−BLH)×Hourly Ratewhere:VOEV=Variable overhead efficiency varianceALH=Actual labor hoursBLH=Budgeted labor hoursHourly Rate=Rate for standard variable overhead
The hourly rate in this formula includes such indirect labor costs as shop foreman and security. If actual labor hours are less than the budgeted or standard amount, the variable overhead efficiency variance is favorable; if actual labor hours are more than the budgeted or standard amount, the variance is unfavorable.
Example of Variable Overhead Efficiency Variance
Consider an example of a widget-manufacturing plant, where the rate for standard variable overhead to account for indirect labor costs is estimated at $20 per hour. Assume that the standard number of hours required to manufacture 1,000 widgets is 2,000 hours. However, the company actually took 2,200 hours to manufacture 1,000 widgets. In this case, the unfavorable variable overhead efficiency variance is (2,200 – 2,000) x $20 = $4,000; the variance is unfavorable because the company took more time than budgeted to produce the 1,000 widgets. If the company had instead taken 1,900 hours to manufacture 1,000 widgets, the variance would be favorable $2,000.
Related terms:
Absorption Costing
Absorption costing is a managerial accounting method for capturing all costs associated with the manufacture of a particular product. read more
Applied Overhead
Applied overhead is a fixed charge assigned to a specific production job or department within a business. read more
Cost Accounting
Cost accounting is a form of managerial accounting that aims to capture a company's total cost of production by assessing its variable and fixed costs. read more
Cost of Labor
The cost of labor is the total of all employee wages plus the cost of benefits and payroll taxes paid by an employer. read more
Efficiency Variance
Efficiency variance is the difference between the theoretical amount of inputs required to produce a unit of output and the actual amount of inputs used. read more
Sales Price Variance
Sales price variance is the difference between the price a business expects to sell its products or services for and what it actually sells them for. read more
Variable Overhead Spending Variance
Variable overhead spending variance is the difference between actual variable overheads and standard variable overheads based on the budgeted costs. read more
Variable Overhead
Variable overhead is the indirect cost of operating a business, which fluctuates with manufacturing activity. read more