# Fixed Overhead Capacity / Efficiency Variances

Can anybody explain these to me.
The Financial Performance book by Kaplan is no help

• Ok so im sure blobby or avic will correct me if im wrong:

Capacity:

This compares the actual hours worked with budgeted hours.

It is calculated by:

Budgeted hours x standard rate
Actual hours x standard rate

For example: A company budgets to use 2000 hours at a standard rate of 7.00 per hour
Actual hours worked were 2200 hours at 7.00 per hour. This would be calculated

2000 x 7 = 14,000

2200 x 7 = 15,400

Variance of £1,400

Efficiency:

All products take different times to produce. This variance calculates how hard they have been working. if we aim to produce 500 units at 3.5hrs each..

Actual hours x standard rate (you may already have this from standard rate)
Standard hours that should have been worked x standard rate

2000 x 7 = 14,000 (Actual)
1750 x 7 = 12,250

Hope this helps a little!

Budgeted output 5,000 units and 50,000 labour hours
Actual output is 4,000 units and 43,000 labour hours

Q1. The fixed overhead efficiency variance is ?
Q2. The fixed overhead capacity variance is ?
• Thanks Katie,
but I can't see how you get the Efficiency variance?

Efficiency: first off calculate 50,000hrs/5000 units = 10 hrs per unit
The standard rate is 1.00 as £50,000/50000 units is 1.00

Actual hours worked at standard rate
43000 hours x 1.00 = 43,000

Should have been
10 (hrs/unit) x 4000 units x 1.00 = 40,000

Difference of 3,000. Adverse as we have actually used 10.75hrs/ unit (calculated 43000/4000.

Capacity:

budgeted hours at standard rate
50,000 x 1.00 = 50,000

actual hours worked at standard rate
43,000 x 1.00 = 43,000

Hope this helps • dpw wrote: »

Budgeted output 5,000 units and 50,000 labour hours
Actual output is 4,000 units and 43,000 labour hours

Q1. The fixed overhead efficiency variance is ?
Q2. The fixed overhead capacity variance is ?

Let's deal with Q2 first?

what is your capacity? ie budgeted hours = 50,000 hrs
How many hours have used? actual hrs = 43,000 hrs

varience = 7000 hrs is this more or less then CAPACITY? Therefore 7000 hrs adverse

Q1 Efficiency variency?

how efficient were you in producing your produc?

work out how many hours do you expect to make a single product? 50 000 hrs / 5000 units = 10 hrs per unit

to produce 4000 units how many hours should you have used? 4000 x 10 = 40 000 hours

hou many hours you have actually taken to produce 4000 units = 43 000 hours

varience is 3 000 hours. were you efficient or inefficient? = therefore 3 000 hrs adverse

to work out monetory value you will need to multiply by standard hourly rate.
• its ok, glad it helped.

I have my financial performance exam in 36 hours from now, (second time around) and have spent forever trying to remember these!
• Sandy Hood did a good paper explaining in layman's terms the various variances. I accessed it when I was revising for management accounting papers late last year. Type her name into the search engine to find her posts.
• Font Of All Knowledge Registered Posts: 2,903
Jonno1 wrote: »
Sandy Hood did a good paper explaining in layman's terms the various variances. I accessed it when I was revising for management accounting papers late last year. Type her name into the search engine to find her posts.

Just for future reference Jonno, Sandy is a he :001_smile: