Business Glossary

difference in actual and budgeted variable overhead costs that results from inefficient use of indirect materials and indirect labor. Variable overhead efficiency variance = (actual labor-hours - standard labor-hours allowed for actual production) ¥ standard variable overhead rate.

For example, assume that the standard cost of direct labor per unit of product A is 2.5 hours ¥ $3 = $7.50. Assume further that during the month of March the company recorded 4500 hours of direct labor time. The actual variable overhead costs were $13,750. The company produced 2000 units of product A during the month. The variable overhead efficiency variance is (4500 - 5000) ¥ $3 = $1500, which is favorable since the actual hours used is less than the standard hours allowed. This may be the result of efficient use of labor time due to automation, use of superior production methods, or good foreman performance.