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Standard costing and Variance Analysis > Factory Overhead Efficiency
Variance - Definition - Explanation - Formula - Calculation - Example
- Interpretation
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Learning Objective of the article: Define and explain factory overhead efficiency variance. How is FOH efficiency variance calculated? What are the reasons / causes of unfavorable overhead efficiency variance. |
Factory Overhead Efficiency Variance:
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Definition:
Factory overhead efficiency variance is the difference between actual hours worked multiplied by standard overhead rate and standard hours allowed times the standard overhead rate.
Overhead efficiency variance is the responsibility of department management. The reasons / causes of unfavorable efficiency variance include inefficiencies, inexperienced labor, changes in operations, new tools, and different types of materials.
Formula of efficiency Variance:
Following formula is used for the calculation of factory overhead efficiency variance:
[(Actual hours worked × Standard overhead rate) – (Standard hours allowed for actual production × Standard overhead rate)]
Example:
Following is the flexible budget of a department of a manufacturing company.
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Department 3 |
|||||
| Capacity | 80% | 90% | 100% | ||
| Standard production | 800 | 1,000 | 1,200 | ||
| Direct labor hours | 3,200 | 4,000 | 4,800 | ||
| Variable factory overhead: | |||||
| Indirect labor | $1,600 | $2,000 | $2,400 | $0.50 / dlh | |
| Indirect materials | 960 | 1,200 | 1,440 | $0.30 | |
| Supplies | 640 | 800 | 960 | $0.20 | |
| Repairs | 480 | 600 | 720 | $0.15 | |
| Power and light | 160 | 200 | 240 | $0.05 | |
| ----------- | ----------- | ----------- | ----------- | ||
| Total variable factory overhead | $3,840 | $4,800 | $5,760 | $1.20 per dlh | |
| ====== | ====== | ====== | ====== | ||
| Fixed factory overhead: | |||||
| Supervisor | $1,200 | $1,200 | $1,200 | ||
| Depreciation on machinery | 700 | 700 | 700 | ||
| Insurance | 250 | 250 | 250 | ||
| Property tax | 250 | 250 | 250 | ||
| Power and light | 400 | 400 | 400 | ||
| Maintenance | 400 | 400 | 400 | ||
| ----------- | ----------- | ----------- | |||
| Total fixed factory overhead | $3,200 | $3,200 | $3,200 | $3,200 per month | |
| ----------- | ----------- | ----------- | ====== | ||
| Total factory overhead | $7,040 | $8,000 | $8,960 |
$3,200 per month + $1.20 per dlh |
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| ====== | ====== | ====== | ====== | ||
Following data is also provided:
Actual factory overhead is $7,384. Actual production is 850 units of finished product. Actual hours used are 3,475 hours. 4 standard hours are allowed to complete a unit of finished product.
Required: Calculate factory overhead efficiency variance.
Calculation of Standard Overhead Rate:
Assuming that 90% column represents normal capacity, the standard overhead rate is computed as follows:
Total factory overhead / Direct labor hours
= $8,000 / 4,000
= $2 per standard direct labor hour
At 90% capacity level, the rate consists of:
Total variable factory overhead / Direct labor hours
= $4,800 / 4,000
= $1.20 variable factory overhead rate
Total fixed factory overhead / Direct labor hours
= $3,200 / 4,000
= $0.80 fixed factory overhead rate
Total factory overhead rate at normal capacity:
($1.20 + $0.80) = $2.00
Calculation of factory overhead efficiency variance:
| Actual hours worked × Standard overhead rate (3,475 actual hours × $2 standard hours) | $6,950 | |
| Standard hours allowed × Standard overhead rate ( 3,400* standards hours × $4 standard overhead rate) | $6,800 | |
| ----------- | ||
| Overhead efficiency variance | $150 unfav. |
*850 × 4 = $3,400
This variance can also be computed as follows:
| Actual hours worked | 3,475 | |
| Standard hours allowed | 3,400 | |
| --------- | ||
| Difference | 75 | |
| --------- | ||
| overhead efficiency variance (75 hours × 2 standard overhead rate) | $150 unfav. | |
| ====== |
This variance consists fixed and variable expenses and occurs when actual hours used are more or less than the 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.
You may also be interested in other relevant articles:
- Standard Costs - Management by Exception
- Setting Standard Costs - Ideal Versus Practical Standards
- Direct Materials Price and Quantity Standards
- Direct Materials Price Variance
- Direct Materials Quantity Variance
- Direct Labor Rate and Efficiency Standards
- Direct Labor Rate | Price Variance
- Direct Labor Efficiency | Usage | Quantity Variance
- Manufacturing Overhead Standards
- Overall or net factory overhead variance
- Factory Overhead Controllable variance
- Factory Overhead Volume variance
- Factory Overhead Spending variance
- Variable Overhead efficiency variance
- Fixed overhead efficiency variance
- Factory Overhead idle capacity variance
- Mix and Yield Variance - Definition and Explanation
- Materials Mix and Yield Variance
- Labor Yield Variance
- Factory Overhead Yield variance
- Variance Analysis and Management By Exception
- Managerial importance and usefulness of variance analysis
- Advantages and Disadvantages of Standard Costing System
- Standard Costing Discussion Questions and Answers
- Standard Costing and Variance Analysis Formulas
- Standard Costing and Variance Analysis Problems and Solution
- Standard Costing and Variance Analysis Case Study
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