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Standard costing and Variance Analysis > Factory Overhead Idle capacity
Variance - Definition - Explanation - Formula - Calculation - Example
- Interpretation
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Learning Objective of the article: Define and explain factory overhead idle capacity variance. How is FOH idle capacity variance calculated? What are the reasons of unfavorable idle capacity variance |
Factory Overhead Idle Capacity Variance:
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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 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.
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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 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:
| Budgeted allowance based on actual hours worked: | |||
| Fixed expenses budgeted | $3,200 | ||
| Variable expenses (3,475 actual hours worked × $1.20 variable overhead rate) | $4,170 | ||
| ----------- | $7,370 | ||
| Actual hours worked × Standard overhead rate (3,475 actual hours × 2 standard hours) | $6,950 | ||
| ----------- | |||
| Unfavorable overhead Idle capacity variance | $420 unfav. |
Idle capacity variance consists of fixed expenses only and can also be computed as follows:
| Normal capacity | 4,000 hours | |
| actual hours worked | 3,475 hours | |
| ------------ | ||
| Difference | 525 hours | |
| ------------ | ||
| Unfavorable Idle capacity variance (525 hours × 0.80 fixed rate) | $420 unfav. | |
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