The Formulae » Fixed Overhead Efficiency Variance (FOHEffV)

The Fixed overhead efficiency variance gives an idea of how much more or less the absorbed fixed overhead cost is when compared to the Standard Fixed Overheads for Actual Activity (Time or Output). ⇒ Fixed Overhead Efficiency Variance     = Fixed Overhead Cost Absorbed − Standard Fixed Overhead Cost for Actual Activity (Time/Output) ⇒ FOHEffV = FOHCA − SFOHC(T/O) • Overheads Absorbed on Unit Rate Basis Standard Fixed Overhead Cost for Actual Activity (Time) = Budgeted Fixed Overhead Cost revised for Actual Time = Actual Time Budgeted Time × Budgeted Fixed Overhead Cost SFOHC(T) = AT BT × BFOHC » Calculations based on Output (in Units) Fixed Overhead Cost Absorbed = (Actual Output × Budgeted Rate/unit) ⇒ FOHCA = AO × BR/U ⇒ FOHEffV = FOHCA − SFOHC(T) = (AO × BR/U) − ( AT BT × BFOH) This can also be interpreted as ⇒ FOHEffV = (AO × BR/U) − ( AT BT × BFOH) = (AO × BR/U) − ( AT BT × (BO × BR/U) = (AO − { AT BT × BO}) × BR/U » Calculations based on Input (Time in Hours) Fixed Overhead Cost Absorbed = (Standard Time for Actual Output × Budgeted Rate/hour) ⇒ FOHCA = ST for AO × BR/H (Or) = {AO × BT BO } × BR/H ⇒ FOHEffV = FOHCA − SFOHC(T) = ({AO × BT BO } × BR/hr) − ( AT BT × BFOH) This can also be interpreted as ⇒ FOHEffV = ({AO × BT BO } × BR/hr) − ( AT BT × BFOH) = ( AO BO × BT × BR/hr) − ( AT BT × BFOH) = ( AO BO × BFOH) − ( AT BT × BFOH) = ( AO BO − AT BT ) × BFOH • Overheads Absorbed on Time Basis Standard Fixed Overhead Cost for Actual Activity (Output) = Budgeted Fixed Overhead Cost revised for Actual Output = Actual Output Budgeted Output × Budgeted Fixed Overhead Cost SFOHC(O) = AO BO × BFOHC » Calculations based on Input (Time in Hours) Fixed Overhead Cost Absorbed = (Actual Time × Budgeted Rate/hour) ⇒ FOHCA = (AT × BR/H) ⇒ FOHEffV = FOHCA − SFOHC(O) = (AT × BR/hr) − ( AO BO × BFOH) This can also be interpreted as ⇒ FOHEffV = (AT × BR/hr) − ( AO BO × BFOH) = (AT × BR/hr) − ( AO BO × BT × BR/hr) = (AT − { AO BO × BT}) × BR/hr » Calculations based on Output (In Units) Fixed Overhead Cost Absorbed = (Standard Output for Actual Time × Budgeted Rate/Unit) ⇒ FOHCA = SO for AT × BR/U (Or) = {AT × BO BT } × BR/U ⇒ FOHEffV = FOHCA − SFOHC(O) = ({AT × BO BT } × BR/U) − ( AO BO × BFOH) This can also be interpreted as ⇒ FOHEffV = ({AT × BO BT } × BR/U) − ( AO BO × BFOH) = ( AT BT × BO × BR/U) − ( AO BO × BFOH) = ( AT BT × BFOH) − ( AO BO × BFOH) = ( AT BT − AO BO ) × BFOH

Efficiency Variance » Formula Interpretation

A Problem

A factory was to budgeted to produce 2,000 units of output @ one unit per 10 hours productive time working for 25 days. Rs. 40,000 of variable overhead cost and Rs. 80,000 of fixed overhead cost were budgeted to be incurred during that period. The factory worked for 26 days putting in 860 hours work every day and achieved an output of 2,050 units. The expenditure incurred as overheads was Rs. 49,200 as variable overheads and Rs. 86,100 as fixed overheads. What is the variation in total overhead cost on account of a variation in the efficiency of operations? This information is provided by the fixed overhead capacity variance

Solution » Working Table

The problem data arranged in a working table: Particulars Budgeted Actual a) Output 2,000 2,050 b) Working Days 25 26 c) Total Time Worked (in hrs) 20,000 22,360 d) Overhead Cost (in Rs.) Variable Fixed Total 40,000 80,000 1,20,000 49,200 86,100 1,35,300 e) Overhead Rates [(d) ÷ (a)] (in Rs./Unit) Variable   [(40,000 ÷ 2,000)] Fixed       [(80,000 ÷ 2,000)] Total       [(1,20,000 ÷ 2,000)] 20 40 60   f) Overhead Rates [(d) ÷ (c)] (in Rs./hr) Variable   [(40,000 ÷ 20,000)] Fixed       [(80,000 ÷ 20,000)] Total       [(1,20,000 ÷ 20,000)] 2 4 6   • Note This working table gives all the data that would be needed to solve a problem involving all overhead variances. In Calculating only the total overhead cost variance you may not need all that data. We give it here so that you get accustomed to preparing the working table by the time you complete going through all the overhead variances.

Solution » Working Notes

• Working Time » Budgeted Time [BT] BT = Budgeted Output × Budgeted Time/unit = 2,000 units × 10 labor/labour hrs/unit [@ one unit per 10 hours productive time] = 20,000 labor/labour hrs » Actual Time [AT] AT = Number of Days × Actual Time/day = 26 days × 860 labour/labor hrs/day = 22,360 labor/labour hrs

Solution [Overheads Absorbed on Unit basis]

Standard Fixed Overhead Cost for Actual Activity (Time) = Actual Time Budgeted Time × Budgeted Fixed Overhead Cost SFOHC(T) = AT BT × BFOHC = 22,360 hours 20,000 hours × Rs. 80,000 = Rs. 1.118 × 80,000 = Rs. 89,440 » Calculations Based on Output (in Units) Fixed Overhead Cost Absorbed = (Actual Output × Budgeted Rate/unit) ⇒ FOHCA = AO × BR/U = 2,050 units × Rs. 40/unit = Rs. 82,000 » Calculations Based on Input (Time in Hours) Fixed Overhead Cost Absorbed = (Standard Time for Actual Output × Budgeted Rate/hour) ⇒ FOHCA = {AO × BT BO } × BR/H = {2,050 units × 20,000 hours 2,000 units } × Rs. 4/hour = Rs. 2,050 × 10 × 4 = Rs. 82,000 • Calculation of Variance FOHEffV = FOHCA − SFOHC(T) = Rs. 82,000 − Rs. 89,440 = − Rs. 7,440 [Adv]

Solution [Overheads Absorbed on Time basis]

Standard Fixed Overhead Cost for Actual Activity (Output) = Actual Output Budgeted Output × Budgeted Fixed Overhead Cost SFOHC(O) = AO BO × BFOHC = 2,050 units 2,000 units × Rs. 80,000 = Rs. 1.025 × 80,000 = Rs. 82,000 » Calculations Based on Input (Time in Hours) Fixed Overhead Cost Absorbed = (Actual Time × Budgeted Rate/hour) ⇒ FOHCA = (AT × BR/H) = 22,360 hours × Rs. 4/hour = Rs. 89,440 » Calculations Based on Output (in Units) Fixed Overhead Cost Absorbed = (Standard Output for Actual Time × Budgeted Rate/Unit) ⇒ FOHCA = {AT × BO BT } × BR/U = {22,360 hours × 2,000 units 20,000 hours } × Rs. 40/unit = Rs. 22,360 × 0.1 × 40 = Rs. 89,440 • Calculation of Variance FOHEffV = FOHCA − SFOHC(O) = Rs. 89,440 − Rs. 82,000 = + Rs. 7,440 [Fav]

Formulae using Inter-relationships among Variances

FOHVolV = FOHEffV + FOHCalV + FOHCapV   → (1) From (1) FOHEffV = FOHVolV − FOHCalV − FOHCapV • Verification The interrelationships between variances would also be useful in verifying whether our calculations are correct or not. After calculating the two fixed overhead variances we can verify whether FOHExpV and FOHVolV add up to FOHCV or not. If FOHExpV + FOHVolV = FOHCV we can assume our calculations to be correct. » Overheads Absorbed on Unit Basis FOHEffV + FOHCalV + FOHCapV = (− Rs. 7,440) + (+ Rs. 3,200) + (+ Rs. 6,240) = + Rs. 2,000 [Fav] = FOHVolV   → TRUE » Overheads Absorbed on Time Basis FOHEffV + FOHCalV + FOHCapV = (+ Rs. 7,440) + (+ Rs. 3,200) + (− Rs. 1,200) = + Rs. 9,440 [Fav] = FOHVolV   → TRUE

Author Credit : The Edifier

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