F/O Capicity Variance
AVic
Registered Posts: 6,970
Can someone explane this variance am always going wrong with it
Thanks
Vic
Thanks
Vic
0
Comments

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 underabsorbed the F/Overheads by (80007950)=50 Hours times £10 = £500 (ADVERSE)
Hope this helps0 
thanks thast perfect ty0
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