PEV Vaiance Analysis question

tomburns1987

Hi Everyone,

I am looking for some help with the Capacity and Efficency variances which make up the volume variance for Fixed overheads.

I can calculate them no problem but do not understand them! I have read the explanation in the text book over and over but just cant get to grips with what they actually mean.

Could anybody think of a better way of wording the explanations so that I can understand please???

Thanks.

Tom.

Rinske

Not sure if this helps, but:

Think about a paint factory where they produce paint per liter.

If they produce more liters of paint than expected in the same amount of hours as planned it would be an efficiency variance. The labour staff would have been more efficient than expected.

If they worked more hours as planned in the same period and produced more paint, (but the same amount of paint per hour) it would be a capacity variance. They worked as normal, but because they worked more hours, they produced more.

Does that make sense?

tomburns1987

Very much so!

Thank you very much for your help. I'll print out your reply and keep it with my notes!

Cheers.

Tom