Definition
Overhead Efficiency Variance, also known as Overhead Productivity Variance or Productivity Variance, is a metric in a standard costing system that quantifies how efficiently overhead resources are used during production. This variance compares the actual time taken for production activities against the budgeted or standard time allocated for those activities, valuing the difference at the standard overhead absorption rate (whether fixed or variable). The resultant variance impacts the budgeted profit, indicating over- or under-recovery of overhead costs due to efficiency differences.
Formula
The formula for calculating Overhead Efficiency Variance is: \[ \text{Overhead Efficiency Variance} = (\text{Actual Hours} - \text{Standard Hours}) \times \text{Standard Overhead Rate} \]
- Actual Hours: The actual time spent on production activities.
- Standard Hours: The time budgeted or considered standard for the production.
- Standard Overhead Rate: The predetermined overhead absorption rate per hour (can be fixed or variable).
Examples
Example 1:
- Standard Hour: 500 hours
- Actual Hour: 450 hours
- Standard Overhead Rate: $30 per hour
\[ \text{Overhead Efficiency Variance} = (450 - 500) \times 30 = -50 \times 30 = -$1500 \]
Since it is negative, there is an adverse variance of $1500, indicating that more overhead was consumed than planned.
Example 2:
- Standard Hour: 400 hours
- Actual Hour: 380 hours
- Standard Overhead Rate: $20 per hour
\[ \text{Overhead Efficiency Variance} = (380 - 400) \times 20 = -20 \times 20 = -$400 \]
An adverse variance of $400, indicating inefficiency in the use of overhead.
Example 3:
- Standard Hour: 600 hours
- Actual Hour: 580 hours
- Standard Overhead Rate: $25 per hour
\[ \text{Overhead Efficiency Variance} = (580 - 600) \times 25 = -20 \times 25 = -$500 \]
An adverse variance of $500.
Frequently Asked Questions (FAQs)
What is the Overhead Efficiency Variance?
Overhead Efficiency Variance is a key metric in standard costing systems that measures the variance between the actual hours taken and the standard hours allowed for production, valued at the standard overhead rate.
Why is Overhead Efficiency Variance important?
It aids in identifying inefficiencies in production processes and helps companies understand the impact of such inefficiencies on their profitability.
How do you calculate Overhead Efficiency Variance?
The formula is: \[ \text{Overhead Efficiency Variance} = (\text{Actual Hours} - \text{Standard Hours}) \times \text{Standard Overhead Rate} \]
What does a favorable Overhead Efficiency Variance indicate?
A favorable variance indicates that less actual time was taken than the standard time, leading to cost savings and indicating efficient use of overhead resources.
What does an adverse Overhead Efficiency Variance indicate?
An adverse variance shows that more actual time was spent than the standard time, resulting in additional costs and indicating inefficiency.
Related Terms
Fixed Overhead Efficiency Variance
This measures the difference in fixed overhead costs due to efficiencies or inefficiencies in the use of fixed overhead resources over a specific period.
Variable Overhead Efficiency Variance
This metric evaluates the difference in variable overhead costs resulting from changes in the efficiency of variable overhead resource usage.
Standard Costing
A costing method that assigns expected costs to products and costs deviations between actual and expected costs, helping in variance analysis.
Overhead Absorption Rate
A predetermined rate used to allocate overhead costs to units of production, based on a specific measure such as machine hours or labor hours.
Online Resources
- Investopedia: Standard Costing
- Accounting Tools: Overhead Variance
- Corporate Finance Institute: Variance Analysis
Suggested Books for Further Studies
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan
- “Managerial Accounting” by Ray H. Garrison, Eric W. Noreen, and Peter C. Brewer
- “Advanced Management Accounting” by Robert S. Kaplan and Anthony A. Atkinson
- “Principles of Managerial Finance” by Lawrence J. Gitman and Chad J. Zutter
- “Financial & Managerial Accounting” by Jan R. Williams, Susan F. Haka, Mark S. Bettner, and Joseph V. Carcello
Accounting Basics: “Overhead Efficiency Variance” Fundamentals Quiz
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