Difference between o/h capacity and overhead efficiency

J070411 Registered Posts: 2 New contributor 🐸
Hi, Could someone please explain in plain English the difference between fixed overhead capacity variance and fixed overhead efficiency variance in financial performance? No matter how many times I look at the descriptions in the textbooks and do practice questions, I can't understand the difference! I think I've just looked at it for too long.

Efficiency variance: Hours actual production DID take vs hours actual production SHOULD have taken times the standard oh/absorption rate per hour
Capacity variance: hours available vs hours used times the oh/absorption rate per hours

I don't see the difference between the hours SHOULD have taken and the hours available.

Exam is tomorrow morning... would like to nail it by then!



  • CeeJaySix
    CeeJaySix Registered Posts: 645
    It's assumed that the budgeted hours are the hours available in your description. Thus if more hours have actually been worked than budgeted, you have a favourable variance due to an increase in capacity. If less have been worked, then it's adverse as maximum use hasn't been made of the assets available (machinery, factory etc).

    Efficiency is what you've managed to produce in a certain time compared to what you were expected to produce in that time. So if you produced 10 units which were expected to take 2hrs labour each, but only actually worked for 19hrs, then you have a favourable efficiency variance.

    Try to remember that the 'actual hours' for the volume variance isn't in fact the actual hours worked - it's the standard hours for the actual level of production achieved. Being given the actual hours worked is the new bit of information required to calculate capacity and efficiency variances.

    Hope that helps, it doesn't seem to be very easy to explain!
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