Variable Overhead Efficiency Variance
Candlefocus EditorVariable Overhead Efficiency Variance allows a company to determine if their costs are within the budgeted amount, and if they are actually meeting the production levels that they set out to achieve. It is important to note that this type of variance is only applicable to variable overhead costs. In other words, it is not applicable to fixed overhead costs, since these are typically not affected by production levels.
The variance is calculated by assuming that the amount of overhead cost is directly related to the number of units produced. This means that the budgeted overhead cost per unit must be proportional to the actual overhead costs per unit. By multiplying the budgeted overhead quantity and cost, and then subtracting the actual overhead cost per unit from that, the variable overhead efficiency variance is determined.
The variance may be a favorable one, meaning that the actual overhead costs are lower than the budgeted costs, or it may be an unfavorable one, meaning that the actual costs are higher than the budgeted costs. A favorable variance shows that the company was efficient in producing their goods and services, while an unfavorable variance indicates that the company was not doing well in keeping the variable overhead costs within their budgeted level.
It is important to note that the variable overhead efficiency variance is only concerned with the level of production and not with the quality of the goods and services produced. Thus, if there is a favorable variance but the quality of goods produced is poor, then the variance has no meaning.
By calculating and analyzing the variable overhead efficiency variance, a company can identify areas in which they can improve their production. They can then adjust the budgeted levels of production to account for any changes that need to be made. This way, the company can ensure that the costs of production are within their budgeted limits and that their production levels are met.
Overall, the variable overhead efficiency variance provides an important metric for companies to measure their performance in meeting production levels. It helps companies to identify areas in which they can make improvements and adjust their budgeted levels as necessary. By calculating and analyzing the variance, companies can ensure that their costs remain within budget and that their production levels remain adequate.