F/O Capicity Variance

A-Vic
A-Vic Registered Posts: 6,970
Can someone explane this variance am always going wrong with it

Thanks

Vic

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  • sdv
    sdv Registered Posts: 585
    A-Vic wrote: »
    Can someone explane this variance am always going wrong with it

    Thanks

    Vic

    Rather then memorising FORMULA for Variences, it's always better to understand them as it will make for sense.

    F/O Capacity Varience

    F/O Capacity is decided at the begining of the year when you plan for production.

    let's say we plan to produce 8000 units and each unit will take 30 minutes to make.

    Our capacity then is 8000 units times 0.5 hrs = 4000 Labour hours

    we will use this 4000 hours to absorb the F/Overheads. (say £10 p/labour hour)

    Now let's say that to produce 8000 units workers took 8100 hours

    But our capacity was 8000 hours!

    so is worker working 8100 hrs, is this better then our capacity of 8000 hrs?

    the answer is YES! (FAVOURABLE) and therefore we have over absorbed F/O expediture by
    100 hours times £10 = £1000 Favourable.

    If on the other hand the worker have been super efficient to produce 8000 units in 7950 hours, what then?

    ask the same question. workers has 8000 hours for production and they have only used 7950 hours. have they used all the hours available to the maximise production. The answer is NO. we could have produce 100 units more, but we wasted 50 hours, therefore we will have an ADVERSE varience

    Also we have now under-absorbed the F/Overheads by (8000-7950)=50 Hours times £10 = £500 (ADVERSE)

    Hope this helps
  • A-Vic
    A-Vic Registered Posts: 6,970
    thanks thast perfect ty :)
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