 There are two forms of overhead rate variation: Fixed overhead rate variance and Variable Overhead Efficiency. These variances refer to the difference between the costs of fixed and variable overhead, respectively. It is important to understand the differences between these two kinds of variances and how they are calculated to improve overhead efficiency. Let’s look at the Variable Overhead Efficiency Variance. How does it affect your overhead rate? Which is better – Fixed overhead rate variance or Variable overhead rate variance?

In production, fixed overhead efficiency variance can be a good or a bad thing. A favorable variance means that more finished goods were produced within the same amount of time as planned. An unfavorable variance means that input labor hours were higher than the standard. In the last two examples, a variance of -50% means that more work was done in less time than planned. When a variance exceeds -50%, corrective measures need to be taken.

A variable overhead efficiency variance rises proportionately to the output. This variance reflects the difference between the standard cost of overheads allowed for the output and the actual cost incurred. Variable overhead variance is calculated separately for direct and overhead variable expenses. If the variance is high, the cause of the variance can be attributed to a price variance. For example, ABC Inc.’s factory used 28,000 hours of direct labor to produce its finished goods, resulting in a variable overhead variance of 5%.

A variable overhead efficiency variance is derived by using inputs from different departments. Production staff submits production expense information, while staff responsible for industrial engineering estimates the number of labor hours required to meet the output requirements. These estimates are based on historical employee productivity, capacity levels of equipment, and depreciation. The variance is then multiplied by the standard absorption rate for the same number of hours. The resulting number is known as the fixed overhead efficiency variance.

Overhead efficiency variance is a measure of the standard cost of manufacturing units divided by the actual hours. The standard cost is the total number of units produced minus the hours actually spent on production. Overhead efficiency variances are used to determine whether the factory is operating efficiently or not. They can be calculated in many ways. For example, if a manufacturing company allocates seven hours per day to overhead, the fixed overhead efficiency variance would be 87,200, while the standard cost is \$4,800.