Describe Variable Overhead Efficiency Variance.

The Variable Overhead Efficiency Variance is a measure used in cost accounting to assess the efficiency of utilizing variable overhead resources, such as indirect labor, indirect materials, and utilities, in the production process. It compares the actual hours worked by these resources to the standard hours allowed for the actual level of output achieved, quantifying the impact of efficiency deviations on variable overhead costs.

The formula to calculate the Variable Overhead Efficiency Variance is:

Variable Overhead Efficiency Variance = (Standard Hours Allowed – Actual Hours) × Variable Overhead Rate

Key aspects of the Variable Overhead Efficiency Variance include:

1. Standard Hours Allowed: This represents the number of hours that should have been worked to produce the actual level of output achieved, based on the standard efficiency levels established by management during the budgeting process. It is calculated by multiplying the standard hours per unit of output by the actual level of output achieved.

2. Actual Hours: This refers to the actual number of hours worked by variable overhead resources in the production process during the period under review. It is determined based on payroll records or other relevant documentation.

3. Variable Overhead Rate: This represents the predetermined rate per hour of variable overhead resources used in the production process. It includes costs such as indirect labor rates, utility expenses, and costs of indirect materials.

4. Interpretation: A favorable Variable Overhead Efficiency Variance occurs when actual hours worked are less than the standard hours allowed, indicating higher efficiency in utilizing variable overhead resources than anticipated. This could result from factors such as improved production processes, better workforce productivity, or reduced machine downtime. Conversely, an unfavorable variance occurs when actual hours exceed the standard hours allowed, suggesting inefficiencies or suboptimal utilization of resources, which may be due to factors such as poor planning, ineffective supervision, or unexpected disruptions in production.

Overall, the Variable Overhead Efficiency Variance provides valuable insights into the efficiency of utilizing variable overhead resources in the production process, enabling management to identify areas for improvement, implement corrective actions, and enhance cost-effectiveness and operational performance.