Variable Overhead Efficiency Variance

Variable overhead efficiency variance is the product of standard variable overhead rate and the difference between the standard units allowed of the variable overhead application base and actual units used of the variable overhead application base. Assuming that variable overhead application base is direct labor hours, the formula to calculate variable overhead efficiency variance will be:

VOH Efficiency Variance = ( SH − AH ) × SR

Where,
   SH are standard direct labor hours allowed
   AH are the actual direct labor hours
   SR is the standard variable overhead rate

The standard direct labor hours allowed (SH) in the above formula is calculated by multiplying standard direct labor hours per unit and actual units produced.

Analysis

As the name suggests, variable overhead efficiency variance measure the efficiency of production department in converting inputs to outputs. Variable overhead efficiency variance is positive when standard hours allowed exceed actual hours. Therefore a positive value is favorable implying that production process was carried out efficiently with minimal loss of resources.

On the other hand when actual hours exceed standard hours allowed, the variance is negative and unfavorable implying that production process was inefficient.

Example

Calculate the variable overhead efficiency variance using the following figures:

Number of Units Produced620
Standard Direct Labor Hours Per Unit0.2
Actual Direct Labor Hours Used130
Standard Variable Overhead Rate$9.40
 
Solution
 
Actual Units Produced620
× Standard Direct Labor Hours Per Unit0.2
Standard Direct Labor Hours Allowed124
 
Standard Hours Allowed124
− Actual Hours Used130
Difference− 6
× Standard Variable Overhead Rate$9.4
Direct Labor Efficiency Variance− $56.4

The variance calculated above is negative and thus unfavorable.

Written by Irfanullah Jan