Variable Overhead Efficiency Variance

AAA

DEFINITION of 'Variable Overhead Efficiency Variance'

The difference between actual variable overhead based on the true time taken to manufacture a product, and standard variable overhead based on the time budgeted for it. 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.


In numerical terms, it is defined as (actual labor hours less budgeted labor hours) x hourly rate for standard variable overhead, which 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.

INVESTOPEDIA EXPLAINS '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
  1. Applied Overhead

    A type of overhead that is recorded under the cost-accounting ...
  2. Variable Cost

    A corporate expense that varies with production output. Variable ...
  3. Fixed Cost

    A cost that does not change with an increase or decrease in the ...
  4. Semi-Variable Cost

    A cost composed of a mixture of fixed and variable components. ...
  5. Absorption Costing

    A managerial accounting cost method of expensing all costs associated ...
  6. patent attorney

    A lawyer with expertise in intellectual property law as it pertains ...
Related Articles
  1. Regression Basics For Business Analysis
    Investing Basics

    Regression Basics For Business Analysis

  2. Spotting Profitability With ROCE
    Fundamental Analysis

    Spotting Profitability With ROCE

  3. Bet Smarter With The Monte Carlo Simulation
    Active Trading Fundamentals

    Bet Smarter With The Monte Carlo Simulation

  4. Operating Leverage Captures Relationships
    Investing

    Operating Leverage Captures Relationships

comments powered by Disqus
Hot Definitions
  1. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  2. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  3. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  4. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  5. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
  6. Earnings Before Interest After Taxes - EBIAT

    A financial measure that is an indicator of a company's operating performance. EBIAT, which is equivalent to after-tax EBIT ...
Trading Center