calculating variance help please
taskey
Registered Posts: 1,800 Beyond epic contributor 🧙♂️
ok, just a quick question, again been reading it for a while and not quite got it.
the answer they have given in the text is
Budgeted hours of work = 10200 hours
actual hours worked = 8500 hours
capacity variance in hours = 1700 hours (A)
x standard absorption rate per hour = x £3.70
£6290 (A)
tabs have not quite worked (6290 is the overall answer)
the bit i dont understand is why is it adverse if you have used less hours than budgeted???
Many thanks in advance
Tracy
the answer they have given in the text is
Budgeted hours of work = 10200 hours
actual hours worked = 8500 hours
capacity variance in hours = 1700 hours (A)
x standard absorption rate per hour = x £3.70
£6290 (A)
tabs have not quite worked (6290 is the overall answer)
the bit i dont understand is why is it adverse if you have used less hours than budgeted???
Many thanks in advance
Tracy
0
Comments

I think this is because the Capacity Variance shows how much of the potential facilities available were used  ie if you had 100 labour hours in a month but only used 75, you were working at only 75% capacity. Therefore you have an adverse variance of 25 hours.
In terms of Overhead Absorption, if you haven't worked as many hours as you budgeted, you won't have absorbed as much overhead cost as planned, ergo you will have an adverse variance due to the underabsorption of costs.
Hope this helps0 
fab, thanks for that
Tracy0
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