Calculate Variable Overhead Efficiency Variance

Overview

Variable overhead efficiency variance is the difference between the standard hours budgeted and the actual hours worked applying with the standard variable overhead rate. Likewise, the company can calculate variable overhead efficiency with the formula of the difference between standard and actual hours multiplying with the standard variable overhead rate.

Variable overhead efficiency variance is favorable when the standard hours budgeted are more than the actual hours worked. This means that the company’s workforce spends less time than budgeted to complete the production. In other words, the company is more efficient than expected in completing the task.

On the other hand, if the standard hours are less than the actual hours, the variance is unfavorable. This means that the company spends more time than the budgeted standard time to complete the work.

For example, the standard hours that the workers should have used to complete the 1,000 units is 100 hours. In this case, if the workers spend 1,100 hours to complete, it will be an unfavorable variable overhead efficiency variance as the workers spend 100 hours more than the standard hours that have been scheduled in the budget plan.

Calculate variable overhead efficiency variance

The company can calculate variable overhead efficiency variance with the formula of standard hours budgeted deducting the actual hours worked, then use the result to multiply with the standard variable overhead rate.

Variable overhead efficiency variance formula:

Using this formula of variable overhead efficiency variance in the calculation, the favorable variance or the unfavorable variance can also be determined with the result of the positive figure or the negative figure. If the result of the calculation is positive, the variance is favorable; on the other hand, if the result is negative, the variance is unfavorable.

Standard hours are the number of hours that the company’s workforce is expected to spend during the period or to spend in completing a certain number of units of production.

Actual hours are the hours that the company’s workforce actually spends during the period or actually spends to complete a certain number of units of production.

Standard hours and actual hours can be labor hours or machine hours depending on which measurement is more suitable. For example, if the manufacturing process depends more on manual work, labor hours may be more suitable. On the other hand, if the work is mostly automation in the production process, the machine hours may be used instead as it is more suitable in this case.

Standard variable overhead rate is the rate that can be determined with the budgeted variable overhead cost dividing by the level of activity which in this case is either labor hours or machine hours.

Variable overhead efficiency variance example

For example, the company ABC, which is a manufacturing company spends 480 direct labor hours during September. However, the standard hours that are budgeted for the company to spend in the production process for September is 500 hours with the standard variable overhead rate of $20 per direct labor hour.

Requirement:

Calculate variable overhead efficiency variance in September.

Solution:

With the information in the example, the company ABC can calculate the variable overhead efficiency variance in September with the formula below:

Variable overhead efficiency variance = (standard hours – actual hours) x standard variable overhead rate

Variable overhead efficiency variance = (500 hours – 480 hours) x $20 per hour = $400 (F)

So, the company ABC has a $400 favorable variable overhead efficiency variance in September. This is due to the company ABC spends only 480 hours which is 20 hours less than the standard hours that are budgeted.

However, this result of $400 of favorable variable overhead efficiency variance doesn’t mean that the company ABC’s total variable overhead variance is favorable. The company ABC needs to also calculate variable overhead spending variance in order to determine the total variable overhead variance as it is the result of the combination of the two variances. In other words, the variable overhead variance is broken down into the variable overhead efficiency variance and the variable overhead spending variance.