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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!
I think I get it but not sure if it’s right.
Capacity variance is the comparison of
Actually made
Expected to makeEffiiency variance is the comparison of
Time actually taken
Time should have takenIs that correct?
Thanks
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.
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.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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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 advanceThe 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
Thank you for all these replies through several years.
Now it’s almost clear.
Capacity variance – the more hours the better (more capacity)
Efficiency variance – the less hours the better (higher efficiency)And what is the logic for volume variance? Should we produce more or less units than in budget to get a favourable variance and why?
The fixed overhead volume variance is the total of capacity and efficiency.
If we produce more than budget then the variance is favourable.
(The reason for this is that if we are using absorption costing then every unit produced will have had fixed overheads charged at the fixed overheads per unit. That means that if we have produced more units than budget then we will have charged too much fixed overheads. So….we ‘correct’ it with the volume variance, which will be increasing the profit to compensate for the overcharge in fixed overheads.)
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