Fixed overhead capacity variance

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    acltang72
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    I don’t understand why when labour works for more hours it is considered as favourable. Because more hours means greater cost? Or does capacity variance represent how much has been produced in the same given hours (similar to efficiency variance except in output terms rather than hours/units)

    Thanks!


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    acltang72
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    I think I get it but not sure if it’s right.

    Capacity variance is the comparison of

    Actually made
    Expected to make

    Effiiency variance is the comparison of

    Time actually taken
    Time should have taken

    Is that correct?

    Thanks


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    spencerli
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    I’m not the tutor, but I was looking at this last night as well.

    The way I think of it, is that it’s the capacity. So say a machine has the capacity to be used for 2 hours, but you actually use it for 4 => then you have done better so it’s favourable.


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    John Moffat
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    In answer to the first question, when we calculate capacity and efficiency variances for fixed overheads, we are actually assuming the it is the supply of labour that is limiting what we can produce.

    So….there are two ways we can produce more: either get more labour (capacity) or work faster (efficiency).
    This means that getting more labour is good – a favourable variance – and also working faster is good – again a favourable variance.


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    John Moffat
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    To answer the second questions, you have written capacity wrong (what you have written is actually the volume variance).

    For capacity, compare the actual hours worked with the budgeted hours. Then cost out the difference at the standard fixed overhead rate per hour.

    For efficiency, compare the actual hours worked with the standard hours for the actual production. Then cost out the difference at the standard fixed overhead rate per hour.

    (The volume variance is capacity + efficiency. It can be calculated on its own by comparing actual units produced with budget production. Then cost out at the standard fixed overhead rate per unit.)

    Remember……for the capacity variance, more hours means we can produce more units so the variance will be favourable (and adverse if less hours).


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    Atropa
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    But this answer isnt acceptable for all situation. Because there is one problem in BPP learning test book. This problem give us 1. Actual hours worked – 5500
    2. Budgeted hours- 5000
    3. And standart hours for actual production – 4800
    I think so that employees for same units have to work 4800 hours but they worked 5000 hours.
    Here why it is favourable variance if it isnt mean more hours it is more units??
    Thank u in advance


    Avatar of johnmoffat
    John Moffat
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    The capacity variance is the difference between actual hours and budgeted hours – this is favourable here because actual hours were more than budgeted hours.

    Efficicency variance is the difference between actual hours and standard hours. This is adverse here because they worked more hours than they were supposed to for the actual production

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