The two variable overhead variances, worked on a factory that absorbs on labour hours, and why the efficiency variance says more about the absorption base than about the overhead.
The variable overhead spending variance is actual variable overhead minus actual hours times the standard rate; the efficiency variance is (actual hours minus standard hours for the actual output) times the standard rate. A factory that spent 2,416,452 over 152,940 labour hours, against a standard of 148,500 hours at 15.00, has a spending variance of 122,352 adverse and an efficiency variance of 66,600 adverse: 188,952 in all.
Worked in full in Cost Accounting by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The hours are those of the labour variance case on this site, so the two analyses can be read side by side. The 15.00 variable rate is an illustrative split of the factory's 84.00 predetermined overhead rate into 15.00 variable and 69.00 fixed.
| Input | Value |
|---|---|
| Actual variable overhead (power, consumables, tooling wear, indirect supplies) | 2,416,452 |
| Actual direct labour hours | 152,940 |
| Standard labour hours allowed for the actual output | 148,500 |
| Standard variable overhead rate per labour hour | 15.00 |
| Fixed overhead rate per labour hour | 69.00 |
| Predetermined overhead rate | 84.00 |
The rate comes from the budget: 2,400,000 of variable overhead over 160,000 budgeted hours. The fixed 11,040,000 gives the other 69.00.
Step 1: the three reference figures. The same structure as for labour, with the allocation base standing in for the input.
Actual cost = 2,416,452 (15.80 an actual hour)
Actual hours × standard rate = 152,940 × 15.00 = 2,294,100
Standard hours × standard rate = 148,500 × 15.00 = 2,227,500
Step 2: the two variances.
Spending variance = 2,416,452 − 2,294,100 = 122,352 adverse
Efficiency variance = (152,940 − 148,500) × 15.00 = 4,440 × 15.00 = 66,600 adverse
Total = 2,416,452 − 2,227,500 = 188,952 adverse
Excel: =ActVOH-ActHrs*StdRate and =(ActHrs-StdHrs)*StdRate
Spending is 64.8 per cent of the total, efficiency 35.2 per cent. The spending variance says the factory spent 0.80 more per labour hour than the standard allows, 5.3 per cent above the flexible budget at actual hours. Unlike the labour rate variance it is not a pure price effect: it mixes the price of electricity and consumables with how much of them each hour actually burned.
The efficiency variance is the one that is routinely misread. It contains no information about whether power or tooling was used efficiently. It is the labour efficiency variance, 4,440 excess hours, priced at 15.00 instead of 30.80. If the crew had hit standard hours the variance would be zero, whatever happened to the electricity bill.
The labour case on this site charges the 4,440 excess hours 84.00 each and reports 372,960 of overhead efficiency variance. Only 66,600 of it is variable overhead that plausibly rose with the hours. The other 306,360 is fixed cost that no hour saved would have avoided; in a four-way analysis it belongs in the volume variance, as in how to calculate the predetermined overhead rate.
The split is only meaningful if variable overhead does rise with labour hours. Test it both ways on the same output of 148,500 standard hours.
| Actual hours | Spending (cost follows hours) | Spending (cost does not) | Efficiency | Total (follows) | Total (does not) |
|---|---|---|---|---|---|
| 148,500 | 118,800 | 188,952 | 0 | 118,800 | 188,952 |
| 149,800 | 119,840 | 169,452 | 19,500 | 139,340 | 188,952 |
| 152,940 | 122,352 | 122,352 | 66,600 | 188,952 | 188,952 |
| 158,000 | 126,400 | 46,452 | 142,500 | 268,900 | 188,952 |
When the cost follows the hours at 15.80, more hours raise the total, and the efficiency variance is a real cost of the extra hours. When the cost is driven by something else, the total stays at 188,952 whatever the crew does, and the two halves simply trade places: at 158,000 hours the report shows 142,500 of adverse efficiency and only 46,452 of spending. A supervisor judged on the efficiency line would be blamed for cost that did not move.
Power and tooling wear in a machining plant usually follow machine hours. Struck at 16.00 a machine hour, with 146,200 actual machine hours against 148,000 standard for the output, the same month gives an efficiency variance of 28,800 favourable and a spending variance of 77,252 adverse, 48,452 in total. The machine-hour standard allows 2,368,000 for the output, 140,500 more than the labour-hour standard, so 140,500 of the 188,952 adverse total on labour hours, about three quarters of it, came from a standard set on the wrong driver rather than from overspending.
The labour side of the same hours is in how to calculate labour rate and efficiency variances, and the book's factory, costed on labour hours and again on five activity drivers, is in the free workbook for this case.
(Actual hours of the allocation base minus standard hours allowed for the actual output) times the standard variable overhead rate. With 152,940 actual labour hours, 148,500 standard and a 15.00 rate, it is 4,440 times 15.00, 66,600 adverse. It measures use of the base, not efficient use of power or consumables.
Paying more per unit of overhead item, using more of it than the base implies, or both, since the spending variance mixes price and quantity of the overhead items. Here actual cost of 2,416,452 against 152,940 hours at 15.00, 2,294,100, leaves 122,352 adverse, 5.3 per cent above the flexible budget at actual hours.
Not in the standard model: fixed overhead does not rise with hours, so excess hours create no extra fixed cost. In a factory absorbing 84.00 an hour, 4,440 excess hours show 372,960 of overhead efficiency variance, but only 66,600 is variable. The other 306,360 is fixed overhead absorbed or not, which sits in the volume variance.
This article is one calculation from Cost Accounting. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: business operations: cost, contracts, pricing and supply chain → · All 1340 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.