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Factory Overhead Idle Capacity Variance:

Learning Objective of the article:

1. Define and explain factory overhead idle capacity variance.
2. How is FOH idle capacity variance calculated?
3. What are the reasons of unfavorable idle capacity variance

Definition and Explanation:

Factory overhead idle capacity variance is the difference between the budget allowance based on actual hours worked and actual hours worked multiplied by standard rate.

The idle capacity 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. This variance is the responsibility of executive management.

Formula of Idle Capacity Variance:

Following formula/equation is used for the calculation of factory overhead idle capacity variance:

[Budgeted allowance based on actual hours worked* – (Actual hours worked × Standard overhead rate)]

*Fixed expenses budgeted + Variable expenses (actual hours worked ×  variable overhead rate)

Example:

Following is the flexible budget of a department of a manufacturing company.

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 idle capacity variance.

Calculation of Standard Overhead Rate:

Assuming that 90% column represents normal capacity, the standard overhead rate is computed as follows:

Total variable 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 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 idle capacity variance:

Idle capacity variance consists of fixed expenses only and can also be computed as follows:

You may also be interested in other articles from "standard costing and variance analysis" chapter

1. Standard Costs and Management By Exception
2. Setting Standard Costs - Ideal Versus Practical Standards
3. Direct Materials Price and Quantity Standards
4. Direct Materials Price Variance
5. Direct Materials Quantity Variance
6. Direct Labor Rate and Efficiency Standards
7. Direct Labor Rate/Price Variance
8. Direct Labor Efficiency | Usage | Quantity Variance
9. Manufacturing Overhead Standards
10. Overall or net factory overhead variance.
11. Controllable variance
12. Volume variance
13. Spending variance
14. Idle capacity variance
15. Efficiency variance
16. Spending variance
17. Variable efficiency variance
18. Fixed efficiency variance
19. Idle capacity variance
20. Mix and Yield Variance - Definition and Explanation
21. Materials Mix and Yield Variance
22. Labor Yield Variance
23. Factory Overhead Yield variance
24. Variance Analysis and Management By Exception
25. Managerial importance and usefulness of variance analysis
26. Advantages and Disadvantages of Standard Costing System
27. Standard Costing Discussion Questions and Answers
28. Standard Costing and Variance Analysis Formulas
29. Standard Costing and Variance Analysis Problems and Solution
30. Standard Costing and Variance Analysis Case Study

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