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11.3 Direct Labour & Overhead Variances

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ACCA Applied Knowledge — Management Accounting MA

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1 Chapter 1: Nature, Purpose & Source of Management Information

1.1 Role of Management Accounting, Planning Levels & Information Quality 1.2 Sources of Data, Big Data & Data Capture Costs 1.3 Cost Classification, Cost Behaviour & Coding Systems

2 Chapter 2: Cost Centres, Cost Units & Presenting Information

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3 Chapter 3: Sampling Methods, Statistical Summaries & Spreadsheets

3.1 Sampling Methods & Practical Selection 3.2 Data Summarisation, Dispersion & Probability in Decisions 3.3 Normal Distribution & Spreadsheet Applications in Accounting

4 Chapter 4: Forecasting Techniques, Time Series & Index Numbers

4.1 Linear Functions & The High-Low Method 4.2 Correlation, Linear Regression & Product Life Cycle 4.3 Time Series Analysis & Index Numbers

5 Chapter 5: Accounting for Materials & Inventory Control

5.1 Material Procedures, Physical Control & Inventory Valuation 5.2 Economic Order Quantity & Bulk Purchase Discounts 5.3 Economic Batch Quantity & Inventory Reorder Levels

6 Chapter 6: Accounting for Labour & Overhead Costs

6.1 Accounting for Labour, Remuneration Systems & Labour Ratios 6.2 Overhead Allocation, Apportionment & Reciprocal Reapportionment 6.3 Overhead Absorption Rates & Under/Over Absorption

7 Chapter 7: Marginal Costing & Absorption Costing

7.1 Marginal Costing, Contribution & Cost-Volume-Profit Analysis 7.2 Profit Comparison & Reconciliation Between Absorption and Marginal Costing

8 Chapter 8: Costing Methods & Alternative Principles

8.1 Job Costing, Batch Costing & Service/Operation Costing 8.2 Process Costing, Losses, Gains & Joint/By-Products 8.3 Alternative Cost Accounting: ABC, Target Costing & Life-Cycle Costing

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10 Chapter 10: Flexible Budgets & Capital Investment Appraisal

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11 Chapter 11: Standard Costing & Basic Cost Variances

11.1 Standard Costing Purpose, Principles & Standard Cost Cards 11.2 Sales Price, Sales Volume & Direct Material Variances 11.3 Direct Labour & Overhead Variances

12 Chapter 12: Variance Investigation & Operating Statements

12.1 Variance Investigation, Interrelationships & Reverse Calculations 12.2 Operating Statements & Profit Reconciliations

13 Chapter 13: Performance Measurement Framework & Financial Analysis

13.1 Mission Statements, Objectives & Contextual Influences 13.2 Financial Performance: Profitability & Operating Efficiency Ratios 13.3 Financial Performance: Liquidity & Financial Gearing Ratios

14 Chapter 14: Divisional Performance, Multidimensional Models & Quality

14.1 Divisional Performance: Return on Investment & Residual Income 14.2 The Balanced Scorecard, Critical Success Factors & KPIs 14.3 Value for Money (3Es), Resource Utilisation & Non-Profit Performance 14.4 Quality Management, Benchmarking, Cost Control & Cost Reduction

11.3 Direct Labour & Overhead Variances

Key Takeaways Explain This Topic AI

Direct Labour Total Variance subdivides into the Labour Rate Variance (evaluated on hours paid), Idle Time Variance (unproductive paid hours, always adverse), and Labour Efficiency Variance (evaluated on hours worked).

Idle Time Variance is calculated as (Actual Hours Paid - Actual Hours Worked) × Standard Hourly Rate, isolating unproductive downtime such as machine breakdowns or power outages.

Variable Production Overhead Total Variance decomposes into the Expenditure Variance (difference in hourly variable spending) and the Efficiency Variance (identical in hours to labour efficiency, valued at the variable OAR).

Fixed Production Overhead Total Variance under absorption costing represents total under- or over-absorption, subdividing into the Expenditure Variance (Budgeted minus Actual) and the Volume Variance (Actual Output minus Budgeted Output at standard fixed OAR per unit).

The Fixed Overhead Volume Variance further divides into the Capacity Variance (comparing actual hours worked to budgeted hours) and the Efficiency Variance (comparing standard hours for actual output to actual hours worked).

Last updated: September 2026

Direct Labour & Overhead Variances

Core Principle: Labour and overhead variances examine operational throughput speed, wage rate management, idle plant capacity, and fixed overhead absorption. When idle time occurs, standard costing strictly segregates hours paid from hours worked to avoid distorting efficiency measurements. Under absorption costing, fixed overhead variances fulfill a dual purpose: explaining cost deviations against budget and reconciling the periodic under- or over-absorption of factory overhead.

1. Direct Labour Variances: Total, Rate, Idle Time & Efficiency

The total direct labour variance isolates whether the actual workforce cost was higher or lower than the standard flexed labour allowance for the units manufactured. In environments subject to unproductive downtime, the total variance splits into three distinct components: Direct Labour Total Variance

  • ┌──────────────────────┼──────────────────────┐
  • ▼ ▼ ▼
  • Labour Rate Variance Idle Time Variance Labour Efficiency Variance
  • (Wage Rate Shifts) (Unproductive Hours) (Speed of Actual Work)
  • [Based on AH Paid] [Always ADVERSE] [Based on AH Worked]
  • A. Direct Labour Total Variance

The total variance compares the standard labour cost of actual production achieved with the actual direct labour payroll incurred: Direct Labour Total Variance = ( Standard Hours for Actual Output × Standard Rate ) − Actual Labour Cost \text{Direct Labour Total Variance} = (\text{Standard Hours for Actual Output} \times \text{Standard Rate}) - \text{Actual Labour Cost} Direct Labour Total Variance = ( Standard Hours for Actual Output × Standard Rate ) − Actual Labour Cost Direct Labour Total Variance = ( S H × S R ) − ( A H paid × A R ) \text{Direct Labour Total Variance} = (SH \times SR) - (AH_{\text{paid}} \times AR) Direct Labour Total Variance = ( S H × SR ) − ( A H paid ​ × A R )

B. Direct Labour Rate Variance

The Labour Rate Variance measures the difference between the standard hourly wage rate and the actual hourly rate paid, applied across all actual hours paid : Direct Labour Rate Variance = ( Standard Rate − Actual Rate ) × Actual Hours Paid \text{Direct Labour Rate Variance} = (\text{Standard Rate} - \text{Actual Rate}) \times \mathbf{\text{Actual Hours Paid}} Direct Labour Rate Variance = ( Standard Rate − Actual Rate ) × Actual Hours Paid Direct Labour Rate Variance = ( A H paid × S R ) − Actual Labour Cost \text{Direct Labour Rate Variance} = (AH_{\text{paid}} \times SR) - \text{Actual Labour Cost} Direct Labour Rate Variance = ( A H paid ​ × SR ) − Actual Labour Cost

If Actual Rate < Standard Rate ⟹ Favourable (F) \text{Actual Rate} < \text{Standard Rate} \implies \mathbf{\text{Favourable (F)}} Actual Rate < Standard Rate ⟹ Favourable (F)

If Actual Rate > Standard Rate ⟹ Adverse (A) \text{Actual Rate} > \text{Standard Rate} \implies \mathbf{\text{Adverse (A)}} Actual Rate > Standard Rate ⟹ Adverse (A)

Operational Causes of Labour Rate Variances:

Adverse: Unscheduled overtime paid at premium rates to meet rush deadlines; deployment of higher-skilled, higher-wage workers on routine jobs; national wage increases or cost-of-living adjustments exceeding budget expectations.

Favourable: Hiring lower-skilled trainees or apprentices at lower wage rates; reduction in overtime premiums; lower-than-anticipated wage settlements.

C. Idle Time Variance

Idle time arises when direct production workers are present and paid, but unable to produce output due to external or internal disruptions (e.g., machine breakdowns, power grid blackouts, raw material delivery delays, or waiting for work orders). Idle Time Variance = ( Actual Hours Worked − Actual Hours Paid ) × Standard Rate = − ( Idle Hours ) × Standard Rate \mathbf{\text{Idle Time Variance}} = (\text{Actual Hours Worked} - \text{Actual Hours Paid}) \times \text{Standard Rate} = -(\text{Idle Hours}) \times \mathbf{\text{Standard Rate}} Idle Time Variance = ( Actual Hours Worked − Actual Hours Paid ) × Standard Rate = − ( Idle Hours ) × Standard Rate

Caution

Cardinal Rule of Idle Time: The Idle Time Variance is ALWAYS ADVERSE (A) (or zero). An organization pays for unproductive hours from which it extracts zero output. Furthermore, idle time must always be valued at the STANDARD labour rate , never the actual rate.

D. Direct Labour Efficiency Variance

The Labour Efficiency Variance measures the productivity of the workforce during the hours they were actively working. It compares the standard hours allowed for the output achieved against the actual hours worked (excluding idle time), valued at the standard rate: Direct Labour Efficiency Variance = ( Standard Hours for Actual Output − Actual Hours Worked ) × Standard Rate \text{Direct Labour Efficiency Variance} = (\mathbf{\text{Standard Hours for Actual Output}} - \mathbf{\text{Actual Hours Worked}}) \times \mathbf{\text{Standard Rate}} Direct Labour Efficiency Variance = ( Standard Hours for Actual Output − Actual Hours Worked ) × Standard Rate Direct Labour Efficiency Variance = ( S H − A H worked ) × S R \text{Direct Labour Efficiency Variance} = (SH - AH_{\text{worked}}) \times SR Direct Labour Efficiency Variance = ( S H − A H worked ​ ) × SR

If Actual Hours Worked < Standard Hours ⟹ Favourable (F) \text{Actual Hours Worked} < \text{Standard Hours} \implies \mathbf{\text{Favourable (F)}} Actual Hours Worked < Standard Hours ⟹ Favourable (F) (Workforce worked faster than standard)

If Actual Hours Worked > Standard Hours ⟹ Adverse (A) \text{Actual Hours Worked} > \text{Standard Hours} \implies \mathbf{\text{Adverse (A)}} Actual Hours Worked > Standard Hours ⟹ Adverse (A) (Workforce took longer than standard)

Important

ACCA Exam Trap: When idle time exists, Labour Rate Variance uses Actual Hours PAID , while Labour Efficiency Variance uses Actual Hours WORKED . Using hours paid in the efficiency formula incorrectly double-counts idle time!

Mathematical Check and Reconciliation: Direct Labour Total Variance = Labour Rate Variance + Idle Time Variance + Labour Efficiency Variance \text{Direct Labour Total Variance} = \text{Labour Rate Variance} + \text{Idle Time Variance} + \text{Labour Efficiency Variance} Direct Labour Total Variance = Labour Rate Variance + Idle Time Variance + Labour Efficiency Variance

2. Variable Production Overhead Variances

Variable production overheads (e.g., indirect factory materials, machine lubricants, consumable tools, and factory power) are assumed to vary directly with activity. In standard costing, variable overhead is usually absorbed using direct labour hours or machine hours. Total variable overhead variance decomposes into Expenditure and Efficiency : Variable Overhead Total Variance

  • ┌────────────────┴────────────────┐
  • ▼ ▼
  • Variable Overhead Expenditure Variable Overhead Efficiency
  • (Hourly Spending Rate Variance) (Linked to Labour Productivity)
  • [Based on AH Worked] [Based on (SH - AH) × Rate]

A. Variable Overhead Total Variance Variable Overhead Total Variance = ( Standard Hours for Actual Output × Standard Variable OAR ) − Actual Variable Overhead Cost \text{Variable Overhead Total Variance} = (\text{Standard Hours for Actual Output} \times \text{Standard Variable OAR}) - \text{Actual Variable Overhead Cost} Variable Overhead Total Variance = ( Standard Hours for Actual Output × Standard Variable OAR ) − Actual Variable Overhead Cost

B. Variable Overhead Expenditure Variance

The Expenditure Variance measures whether the business paid more or less per hour of active operation than the standard variable overhead rate: Variable Overhead Expenditure Variance = ( A H worked × Standard Variable OAR ) − Actual Variable Overhead Cost \text{Variable Overhead Expenditure Variance} = (AH_{\text{worked}} \times \text{Standard Variable OAR}) - \text{Actual Variable Overhead Cost} Variable Overhead Expenditure Variance = ( A H worked ​ × Standard Variable OAR ) − Actual Variable Overhead Cost Variable Overhead Expenditure Variance = ( Standard Variable OAR − Actual Variable OAR ) × A H worked \text{Variable Overhead Expenditure Variance} = (\text{Standard Variable OAR} - \text{Actual Variable OAR}) \times AH_{\text{worked}} Variable Overhead Expenditure Variance = ( Standard Variable OAR − Actual Variable OAR ) × A H worked ​

C. Variable Overhead Efficiency Variance

The Efficiency Variance measures the variable overhead cost caused by worker productivity deviations. If workers are inefficient and take longer to produce goods, the factory consumes extra power, lighting, and lubricants: Variable Overhead Efficiency Variance = ( Standard Hours for Actual Output − Actual Hours Worked ) × Standard Variable OAR \text{Variable Overhead Efficiency Variance} = (\mathbf{\text{Standard Hours for Actual Output}} - \mathbf{\text{Actual Hours Worked}}) \times \mathbf{\text{Standard Variable OAR}} Variable Overhead Efficiency Variance = ( Standard Hours for Actual Output − Actual Hours Worked ) × Standard Variable OAR Variable Overhead Efficiency Variance = ( S H − A H worked ) × Standard Variable OAR \text{Variable Overhead Efficiency Variance} = (SH - AH_{\text{worked}}) \times \text{Standard Variable OAR} Variable Overhead Efficiency Variance = ( S H − A H worked ​ ) × Standard Variable OAR

Tip

The Mathematical Mirror: Notice that the physical hour deviation ( S H − A H worked ) (SH - AH_{\text{worked}}) ( S H − A H worked ​ ) in the Variable Overhead Efficiency Variance is identical to that in the Direct Labour Efficiency Variance! If labour efficiency is favourable, variable overhead efficiency is always favourable, differing only by the multiplying absorption rate.

3. Fixed Production Overhead Variances (Absorption Costing)

Fixed production overheads (e.g., factory rent, business property taxes, plant depreciation, supervisor salaries) do not fluctuate with short-term changes in production output. However, under standard absorption costing , fixed overheads are absorbed into product units via a predetermined fixed overhead absorption rate (FOAR). This accounting mechanism creates two distinct variance dimensions: spending against budget and output volume absorption.

A. Fixed Overhead Total Variance (Under/Over Absorption)

The total variance represents the total under- or over-absorption of fixed production overhead for the period: Fixed Overhead Total Variance = Absorbed Fixed Overhead − Actual Fixed Overhead \text{Fixed Overhead Total Variance} = \text{Absorbed Fixed Overhead} - \text{Actual Fixed Overhead} Fixed Overhead Total Variance = Absorbed Fixed Overhead − Actual Fixed Overhead Absorbed Fixed Overhead = Actual Units Produced × Standard Fixed OAR per Unit \text{Absorbed Fixed Overhead} = \text{Actual Units Produced} \times \text{Standard Fixed OAR per Unit} Absorbed Fixed Overhead = Actual Units Produced × Standard Fixed OAR per Unit Absorbed Fixed Overhead = Standard Hours for Actual Output ( S H ) × Standard Fixed OAR per Hour \text{Absorbed Fixed Overhead} = \text{Standard Hours for Actual Output} (SH) \times \text{Standard Fixed OAR per Hour} Absorbed Fixed Overhead = Standard Hours for Actual Output ( S H ) × Standard Fixed OAR per Hour

If Absorbed > Actual ⟹ Favourable (F) (Over-absorption) \text{Absorbed} > \text{Actual} \implies \mathbf{\text{Favourable (F)}} \quad \text{(Over-absorption)} Absorbed > Actual ⟹ Favourable (F) (Over-absorption)

If Absorbed < Actual ⟹ Adverse (A) (Under-absorption) \text{Absorbed} < \text{Actual} \implies \mathbf{\text{Adverse (A)}} \quad \text{(Under-absorption)} Absorbed < Actual ⟹ Adverse (A) (Under-absorption)

  • B. The Two-Way Split: Expenditure and Volume Variances Fixed Overhead Total Variance
  • ┌──────────────┴──────────────┐
  • ▼ ▼
  • Fixed Overhead Expenditure Fixed Overhead Volume
  • (Budgeted vs. Actual Spending) (Absorbed Output vs. Budget)
  • 1. Fixed Overhead Expenditure Variance

The Expenditure Variance measures the absolute difference between the original budgeted fixed overhead and the actual fixed overhead incurred: Fixed Overhead Expenditure Variance = Budgeted Fixed Overhead − Actual Fixed Overhead \mathbf{\text{Fixed Overhead Expenditure Variance}} = \mathbf{\text{Budgeted Fixed Overhead}} - \mathbf{\text{Actual Fixed Overhead}} Fixed Overhead Expenditure Variance = Budgeted Fixed Overhead − Actual Fixed Overhead

If Actual Spending < Budgeted ⟹ Favourable (F) \text{Actual Spending} < \text{Budgeted} \implies \mathbf{\text{Favourable (F)}} Actual Spending < Budgeted ⟹ Favourable (F)

If Actual Spending > Budgeted ⟹ Adverse (A) \text{Actual Spending} > \text{Budgeted} \implies \mathbf{\text{Adverse (A)}} Actual Spending > Budgeted ⟹ Adverse (A)

Caution

Crucial ACCA Principle: Budgeted fixed overhead is NEVER flexed ! Fixed overhead costs are, by definition, invariant to activity volume within the relevant range. The expenditure variance compares actual spending directly to the original master budget.

2. Fixed Overhead Volume Variance

The Volume Variance measures the overhead absorbed by producing more or fewer units than originally budgeted: Fixed Overhead Volume Variance = ( Actual Output Units − Budgeted Output Units ) × Standard Fixed OAR per Unit \text{Fixed Overhead Volume Variance} = (\text{Actual Output Units} - \text{Budgeted Output Units}) \times \mathbf{\text{Standard Fixed OAR per Unit}} Fixed Overhead Volume Variance = ( Actual Output Units − Budgeted Output Units ) × Standard Fixed OAR per Unit Fixed Overhead Volume Variance = ( Standard Hours for Actual Output − Budgeted Hours ) × Standard Fixed OAR per Hour \text{Fixed Overhead Volume Variance} = (\text{Standard Hours for Actual Output} - \text{Budgeted Hours}) \times \mathbf{\text{Standard Fixed OAR per Hour}} Fixed Overhead Volume Variance = ( Standard Hours for Actual Output − Budgeted Hours ) × Standard Fixed OAR per Hour

If Actual Output > Budgeted Output ⟹ Favourable (F) \text{Actual Output} > \text{Budgeted Output} \implies \mathbf{\text{Favourable (F)}} Actual Output > Budgeted Output ⟹ Favourable (F)

If Actual Output < Budgeted Output ⟹ Adverse (A) \text{Actual Output} < \text{Budgeted Output} \implies \mathbf{\text{Adverse (A)}} Actual Output < Budgeted Output ⟹ Adverse (A)

C. The Advanced Three-Way / Four-Way Split: Capacity and Efficiency

To pinpoint why actual volume differed from budget, the Fixed Overhead Volume Variance is subdivided into Capacity and Efficiency : Fixed Overhead Volume Variance = Capacity Variance + Efficiency Variance \mathbf{\text{Fixed Overhead Volume Variance}} = \mathbf{\text{Capacity Variance}} + \mathbf{\text{Efficiency Variance}} Fixed Overhead Volume Variance = Capacity Variance + Efficiency Variance

1. Fixed Overhead Capacity Variance:

Measures whether the factory worked more or fewer hours than budgeted (plant utilization): Fixed Overhead Capacity Variance = ( Actual Hours Worked − Budgeted Hours ) × Standard Fixed OAR per Hour \text{Fixed Overhead Capacity Variance} = (\mathbf{\text{Actual Hours Worked}} - \mathbf{\text{Budgeted Hours}}) \times \mathbf{\text{Standard Fixed OAR per Hour}} Fixed Overhead Capacity Variance = ( Actual Hours Worked − Budgeted Hours ) × Standard Fixed OAR per Hour

If Actual Hours Worked > Budgeted Hours ⟹ Favourable (F) \text{Actual Hours Worked} > \text{Budgeted Hours} \implies \mathbf{\text{Favourable (F)}} Actual Hours Worked > Budgeted Hours ⟹ Favourable (F)

If Actual Hours Worked < Budgeted Hours ⟹ Adverse (A) \text{Actual Hours Worked} < \text{Budgeted Hours} \implies \mathbf{\text{Adverse (A)}} Actual Hours Worked < Budgeted Hours ⟹ Adverse (A)

2. Fixed Overhead Efficiency Variance:

Measures whether the workforce transformed active hours worked into output at faster or slower rates than standard: Fixed Overhead Efficiency Variance = ( Standard Hours for Actual Output − Actual Hours Worked ) × Standard Fixed OAR per Hour \text{Fixed Overhead Efficiency Variance} = (\mathbf{\text{Standard Hours for Actual Output}} - \mathbf{\text{Actual Hours Worked}}) \times \mathbf{\text{Standard Fixed OAR per Hour}} Fixed Overhead Efficiency Variance = ( Standard Hours for Actual Output − Actual Hours Worked ) × Standard Fixed OAR per Hour

If S H > A H worked ⟹ Favourable (F) SH > AH_{\text{worked}} \implies \mathbf{\text{Favourable (F)}} S H > A H worked ​ ⟹ Favourable (F)

If S H < A H worked ⟹ Adverse (A) SH < AH_{\text{worked}} \implies \mathbf{\text{Adverse (A)}} S H < A H worked ​ ⟹ Adverse (A)

Fixed Overhead under Marginal Costing

Under Standard Marginal Costing , fixed overheads are not absorbed into products or inventory. Therefore, there is NO volume variance, NO capacity variance, and NO efficiency variance . The only fixed overhead variance recognized under marginal costing is the Fixed Overhead Expenditure Variance .

4. Comprehensive Integrated Numerical Example: Labour and Overhead Variances

Scenario: Sterling Industrial Equipment Ltd manufactures a heavy-duty hydraulic pump, Pump Titan. The standard cost profile and monthly operating budget for June are established as follows:

Budgeted Standards:

Budgeted monthly production and sales: 1,000 pumps

Direct Labour Standard: 5.0 direct labour hours per pump at a standard rate of $20.00 per hour ($100.00 per pump).

Budgeted Direct Labour Hours: 1 , 000 pumps × 5.0 hours = 5 , 000 hours 1,000 \text{ pumps} \times 5.0 \text{ hours} = \mathbf{5,000 \text{ hours}} 1 , 000 pumps × 5.0 hours = 5 , 000 hours

Variable Production Overhead: Absorbed at $8.00 per direct labour hour ($40.00 per pump).

Budgeted Variable Overhead: 5 , 000 hours × $ 8.00 = $ 40 , 000 5,000 \text{ hours} \times \text{\textdollar}8.00 = \mathbf{\text{\textdollar}40,000} 5 , 000 hours × $ 8.00 = $ 40 , 000

Budgeted Fixed Production Overhead: $60,000 per month

Standard Fixed Overhead Absorption Rate (FOAR): FOAR per Hour = $ 60 , 000 5 , 000 hours = $ 12.00 per direct labour hour \text{FOAR per Hour} = \frac{\$60,000}{5,000 \text{ hours}} = \mathbf{\$12.00 \text{ per direct labour hour}} FOAR per Hour = 5 , 000 hours $60 , 000 ​ = $12.00 per direct labour hour FOAR per Unit = 5.0 hours × $ 12.00 = $ 60.00 per pump \text{FOAR per Unit} = 5.0 \text{ hours} \times \$12.00 = \mathbf{\$60.00 \text{ per pump}} FOAR per Unit = 5.0 hours × $12.00 = $60.00 per pump

Actual Results for June:

Actual Production Output: 1,100 pumps

Direct Labour Hours Paid: 5,600 hours at a total gross cost of $117,600 (Actual Rate = $ 117 , 600 5 , 600 = $ 21.00 \frac{\text{\textdollar}117,600}{5,600} = \text{\textdollar}21.00 5 , 600 $ 117 , 600 ​ = $ 21.00 per hour).

Direct Labour Hours Worked: 5,350 hours

Unproductive Idle Time: 250 hours (caused by a regional electrical grid outage).

  • Actual Variable Production Overhead: $45,475
  • Actual Fixed Production Overhead: $63,500
  • Step 1: Calculate Direct Labour Variances

Standard Hours for Actual Output: S H = 1 , 100 pumps × 5.0 hours = 5 , 500 hours \mathbf{SH} = 1,100 \text{ pumps} \times 5.0 \text{ hours} = \mathbf{5,500 \text{ hours}} SH = 1 , 100 pumps × 5.0 hours = 5 , 500 hours

Direct Labour Rate Variance: Rate Variance = ( Standard Rate − Actual Rate ) × Actual Hours Paid \text{Rate Variance} = (\text{Standard Rate} - \text{Actual Rate}) \times \text{Actual Hours Paid} Rate Variance = ( Standard Rate − Actual Rate ) × Actual Hours Paid Rate Variance = ( $ 20.00 − $ 21.00 ) × 5 , 600 hours = − $ 1.00 × 5 , 600 = − $ 5 , 600 ⟹ $ 5 , 600 Adverse (A) \text{Rate Variance} = (\$20.00 - \$21.00) \times 5,600 \text{ hours} = -\$1.00 \times 5,600 = -\$5,600 \implies \mathbf{\$5,600 \text{ Adverse (A)}} Rate Variance = ( $20.00 − $21.00 ) × 5 , 600 hours = − $1.00 × 5 , 600 = − $5 , 600 ⟹ $5 , 600 Adverse (A)

Idle Time Variance: Idle Time Variance = − ( Idle Hours ) × Standard Rate \text{Idle Time Variance} = -(\text{Idle Hours}) \times \text{Standard Rate} Idle Time Variance = − ( Idle Hours ) × Standard Rate Idle Time Variance = − ( 5 , 600 paid − 5 , 350 worked ) × $ 20.00 = − 250 hours × $ 20.00 = − $ 5 , 000 ⟹ $ 5 , 000 Adverse (A) \text{Idle Time Variance} = -(5,600 \text{ paid} - 5,350 \text{ worked}) \times \$20.00 = -250 \text{ hours} \times \$20.00 = -\$5,000 \implies \mathbf{\$5,000 \text{ Adverse (A)}} Idle Time Variance = − ( 5 , 600 paid − 5 , 350 worked ) × $20.00 = − 250 hours × $20.00 = − $5 , 000 ⟹ $5 , 000 Adverse (A)

Direct Labour Efficiency Variance: Efficiency Variance = ( S H − A H worked ) × Standard Rate \text{Efficiency Variance} = (SH - AH_{\text{worked}}) \times \text{Standard Rate} Efficiency Variance = ( S H − A H worked ​ ) × Standard Rate Efficiency Variance = ( 5 , 500 hours − 5 , 350 hours ) × $ 20.00 = + 150 hours × $ 20.00 = + $ 3 , 000 ⟹ $ 3 , 000 Favourable (F) \text{Efficiency Variance} = (5,500 \text{ hours} - 5,350 \text{ hours}) \times \$20.00 = +150 \text{ hours} \times \$20.00 = +\$3,000 \implies \mathbf{\$3,000 \text{ Favourable (F)}} Efficiency Variance = ( 5 , 500 hours − 5 , 350 hours ) × $20.00 = + 150 hours × $20.00 = + $3 , 000 ⟹ $3 , 000 Favourable (F)

Direct Labour Total Variance Check: Standard Cost of Actual Output ( 5 , 500 hours × $ 20.00 ) = $ 110 , 000 \text{Standard Cost of Actual Output} (5,500 \text{ hours} \times \$20.00) = \$110,000 Standard Cost of Actual Output ( 5 , 500 hours × $20.00 ) = $110 , 000 Actual Labour Cost Incurred = $ 117 , 600 \text{Actual Labour Cost Incurred} = \$117,600 Actual Labour Cost Incurred = $117 , 600 Total Labour Variance = $ 110 , 000 − $ 117 , 600 = − $ 7 , 600 ⟹ $ 7 , 600 Adverse (A) \text{Total Labour Variance} = \$110,000 - \$117,600 = -\$7,600 \implies \mathbf{\$7,600 \text{ Adverse (A)}} Total Labour Variance = $110 , 000 − $117 , 600 = − $7 , 600 ⟹ $7 , 600 Adverse (A) Reconciliation: − $ 5 , 600 (Rate A) − $ 5 , 000 (Idle A) + $ 3 , 000 (Effic F) = − $ 7 , 600 (Total A) \text{Reconciliation:} \quad -\$5,600 \text{ (Rate A)} - \$5,000 \text{ (Idle A)} + \$3,000 \text{ (Effic F)} = \mathbf{-\$7,600 \text{ (Total A)}} Reconciliation: − $5 , 600 (Rate A) − $5 , 000 (Idle A) + $3 , 000 (Effic F) = − $7 , 600 (Total A)

Step 2: Calculate Variable Overhead Variances

Standard Variable Overhead for Actual Output: 5 , 500 standard hours × $ 8.00 = $ 44 , 000 5,500 \text{ standard hours} \times \$8.00 = \mathbf{\$44,000} 5 , 500 standard hours × $8.00 = $44 , 000

Variable Overhead Expenditure Variance: Expenditure Variance = ( A H worked × Std Rate ) − Actual Cost \text{Expenditure Variance} = (AH_{\text{worked}} \times \text{Std Rate}) - \text{Actual Cost} Expenditure Variance = ( A H worked ​ × Std Rate ) − Actual Cost Expenditure Variance = ( 5 , 350 hours × $ 8.00 ) − $ 45 , 475 = $ 42 , 800 − $ 45 , 475 = − $ 2 , 675 ⟹ $ 2 , 675 Adverse (A) \text{Expenditure Variance} = (5,350 \text{ hours} \times \$8.00) - \$45,475 = \$42,800 - \$45,475 = -\$2,675 \implies \mathbf{\$2,675 \text{ Adverse (A)}} Expenditure Variance = ( 5 , 350 hours × $8.00 ) − $45 , 475 = $42 , 800 − $45 , 475 = − $2 , 675 ⟹ $2 , 675 Adverse (A)

Variable Overhead Efficiency Variance: Efficiency Variance = ( S H − A H worked ) × Std Variable OAR \text{Efficiency Variance} = (SH - AH_{\text{worked}}) \times \text{Std Variable OAR} Efficiency Variance = ( S H − A H worked ​ ) × Std Variable OAR Efficiency Variance = ( 5 , 500 hours − 5 , 350 hours ) × $ 8.00 = + 150 hours × $ 8.00 = + $ 1 , 200 ⟹ $ 1 , 200 Favourable (F) \text{Efficiency Variance} = (5,500 \text{ hours} - 5,350 \text{ hours}) \times \$8.00 = +150 \text{ hours} \times \$8.00 = +\$1,200 \implies \mathbf{\$1,200 \text{ Favourable (F)}} Efficiency Variance = ( 5 , 500 hours − 5 , 350 hours ) × $8.00 = + 150 hours × $8.00 = + $1 , 200 ⟹ $1 , 200 Favourable (F)

Variable Overhead Total Variance Check: Total Variable Overhead Variance = $ 44 , 000 − $ 45 , 475 = − $ 1 , 475 ⟹ $ 1 , 475 Adverse (A) \text{Total Variable Overhead Variance} = \$44,000 - \$45,475 = -\$1,475 \implies \mathbf{\$1,475 \text{ Adverse (A)}} Total Variable Overhead Variance = $44 , 000 − $45 , 475 = − $1 , 475 ⟹ $1 , 475 Adverse (A) Reconciliation: − $ 2 , 675 (Expend A) + $ 1 , 200 (Effic F) = − $ 1 , 475 (Total A) \text{Reconciliation:} \quad -\$2,675 \text{ (Expend A)} + \$1,200 \text{ (Effic F)} = \mathbf{-\$1,475 \text{ (Total A)}} Reconciliation: − $2 , 675 (Expend A) + $1 , 200 (Effic F) = − $1 , 475 (Total A)

Step 3: Calculate Fixed Overhead Variances (Absorption Costing)

Fixed Overhead Absorbed: Absorbed Overhead = 1 , 100 actual units × $ 60.00 per unit = $ 66 , 000 \text{Absorbed Overhead} = 1,100 \text{ actual units} \times \$60.00 \text{ per unit} = \mathbf{\$66,000} Absorbed Overhead = 1 , 100 actual units × $60.00 per unit = $66 , 000

(Alternatively: 5 , 500 SH × $ 12.00 = $ 66 , 000 5,500 \text{ SH} \times \text{\textdollar}12.00 = \text{\textdollar}66,000 5 , 500 SH × $ 12.00 = $ 66 , 000 ).

Fixed Overhead Total Variance (Net Over-Absorption): Total Variance = Absorbed Fixed Overhead − Actual Fixed Overhead \text{Total Variance} = \text{Absorbed Fixed Overhead} - \text{Actual Fixed Overhead} Total Variance = Absorbed Fixed Overhead − Actual Fixed Overhead Total Variance = $ 66 , 000 − $ 63 , 500 = + $ 2 , 500 ⟹ $ 2 , 500 Favourable (F) (Over-absorbed) \text{Total Variance} = \$66,000 - \$63,500 = +\$2,500 \implies \mathbf{\$2,500 \text{ Favourable (F)}} \quad \text{(Over-absorbed)} Total Variance = $66 , 000 − $63 , 500 = + $2 , 500 ⟹ $2 , 500 Favourable (F) (Over-absorbed)

The Two-Way Decomposition:

Fixed Overhead Expenditure Variance: Expenditure Variance = Budgeted Fixed Overhead − Actual Fixed Overhead \text{Expenditure Variance} = \text{Budgeted Fixed Overhead} - \text{Actual Fixed Overhead} Expenditure Variance = Budgeted Fixed Overhead − Actual Fixed Overhead Expenditure Variance = $ 60 , 000 − $ 63 , 500 = − $ 3 , 500 ⟹ $ 3 , 500 Adverse (A) \text{Expenditure Variance} = \$60,000 - \$63,500 = -\$3,500 \implies \mathbf{\$3,500 \text{ Adverse (A)}} Expenditure Variance = $60 , 000 − $63 , 500 = − $3 , 500 ⟹ $3 , 500 Adverse (A)

Fixed Overhead Volume Variance: Volume Variance = ( Actual Output − Budget Output ) × Fixed OAR per Unit \text{Volume Variance} = (\text{Actual Output} - \text{Budget Output}) \times \text{Fixed OAR per Unit} Volume Variance = ( Actual Output − Budget Output ) × Fixed OAR per Unit Volume Variance = ( 1 , 100 units − 1 , 000 units ) × $ 60.00 = + 100 units × $ 60.00 = + $ 6 , 000 ⟹ $ 6 , 000 Favourable (F) \text{Volume Variance} = (1,100 \text{ units} - 1,000 \text{ units}) \times \$60.00 = +100 \text{ units} \times \$60.00 = +\$6,000 \implies \mathbf{\$6,000 \text{ Favourable (F)}} Volume Variance = ( 1 , 100 units − 1 , 000 units ) × $60.00 = + 100 units × $60.00 = + $6 , 000 ⟹ $6 , 000 Favourable (F)

Check 2-Way: − $ 3 , 500 (Expend A) + $ 6 , 000 (Volume F) = + $ 2 , 500 Favourable (F) -\text{\textdollar}3,500 \text{ (Expend A)} + \text{\textdollar}6,000 \text{ (Volume F)} = \mathbf{+\text{\textdollar}2,500 \text{ Favourable (F)}} − $ 3 , 500 (Expend A) + $ 6 , 000 (Volume F) = + $ 2 , 500 Favourable (F) .

The Sub-Division of Volume Variance (Capacity vs. Efficiency):

Fixed Overhead Capacity Variance: Capacity Variance = ( A H worked − Budgeted Hours ) × Fixed OAR per Hour \text{Capacity Variance} = (AH_{\text{worked}} - \text{Budgeted Hours}) \times \text{Fixed OAR per Hour} Capacity Variance = ( A H worked ​ − Budgeted Hours ) × Fixed OAR per Hour Capacity Variance = ( 5 , 350 hours − 5 , 000 hours ) × $ 12.00 = + 350 hours × $ 12.00 = + $ 4 , 200 ⟹ $ 4 , 200 Favourable (F) \text{Capacity Variance} = (5,350 \text{ hours} - 5,000 \text{ hours}) \times \$12.00 = +350 \text{ hours} \times \$12.00 = +\$4,200 \implies \mathbf{\$4,200 \text{ Favourable (F)}} Capacity Variance = ( 5 , 350 hours − 5 , 000 hours ) × $12.00 = + 350 hours × $12.00 = + $4 , 200 ⟹ $4 , 200 Favourable (F)

Fixed Overhead Efficiency Variance: Efficiency Variance = ( S H − A H worked ) × Fixed OAR per Hour \text{Efficiency Variance} = (SH - AH_{\text{worked}}) \times \text{Fixed OAR per Hour} Efficiency Variance = ( S H − A H worked ​ ) × Fixed OAR per Hour Efficiency Variance = ( 5 , 500 hours − 5 , 350 hours ) × $ 12.00 = + 150 hours × $ 12.00 = + $ 1 , 800 ⟹ $ 1 , 800 Favourable (F) \text{Efficiency Variance} = (5,500 \text{ hours} - 5,350 \text{ hours}) \times \$12.00 = +150 \text{ hours} \times \$12.00 = +\$1,800 \implies \mathbf{\$1,800 \text{ Favourable (F)}} Efficiency Variance = ( 5 , 500 hours − 5 , 350 hours ) × $12.00 = + 150 hours × $12.00 = + $1 , 800 ⟹ $1 , 800 Favourable (F)

Check Volume Split: $ 4 , 200 (Capacity F) + $ 1 , 800 (Efficiency F) = + $ 6 , 000 (Volume F) \text{\textdollar}4,200 \text{ (Capacity F)} + \text{\textdollar}1,800 \text{ (Efficiency F)} = \mathbf{+\text{\textdollar}6,000 \text{ (Volume F)}} $ 4 , 200 (Capacity F) + $ 1 , 800 (Efficiency F) = + $ 6 , 000 (Volume F) .

5. Master Summary Table of Basic Cost Variances

Cost Component Primary Price / Spending Variance Primary Usage / Efficiency Variance Volume / Secondary Split

Direct Materials Material Price Variance ; ( S P − A P ) × A Q purchased/used (SP - AP) \times AQ_{\text{purchased/used}} ( SP − A P ) × A Q purchased/used ​ Material Usage Variance ; ( S Q − A Q used ) × S P (SQ - AQ_{\text{used}}) \times SP ( SQ − A Q used ​ ) × SP Not applicable in basic standard costing

Direct Labour Labour Rate Variance ; ( S R − A R ) × A H paid (SR - AR) \times AH_{\text{paid}} ( SR − A R ) × A H paid ​ Labour Efficiency Variance ; ( S H − A H worked ) × S R (SH - AH_{\text{worked}}) \times SR ( S H − A H worked ​ ) × SR Idle Time Variance ; − ( A H paid − A H worked ) × S R -(AH_{\text{paid}} - AH_{\text{worked}}) \times SR − ( A H paid ​ − A H worked ​ ) × SR (Always A)

Variable Overheads Variable Overhead Expenditure ; ( A H worked × Std OAR ) − Actual Cost (AH_{\text{worked}} \times \text{Std OAR}) - \text{Actual Cost} ( A H worked ​ × Std OAR ) − Actual Cost Variable Overhead Efficiency ; ( S H − A H worked ) × Std Variable OAR (SH - AH_{\text{worked}}) \times \text{Std Variable OAR} ( S H − A H worked ​ ) × Std Variable OAR Not applicable

Fixed Overheads (Absorption) Fixed Overhead Expenditure ; Budgeted Cost − Actual Cost \text{Budgeted Cost} - \text{Actual Cost} Budgeted Cost − Actual Cost Fixed Overhead Volume ; ( A c t u a l U n i t s − B u d g e t U n i t s ) × F O A R unit (Actual\ Units - Budget\ Units) \times FOAR_{\text{unit}} ( A c t u a l U ni t s − B u d g e t U ni t s ) × FO A R unit ​ Volume splits into: ; • Capacity: ( A H worked − B u d g e t H o u r s ) × F O A R hr (AH_{\text{worked}} - Budget\ Hours) \times FOAR_{\text{hr}} ( A H worked ​ − B u d g e t Ho u rs ) × FO A R hr ​ ; • Efficiency: ( S H − A H worked ) × F O A R hr (SH - AH_{\text{worked}}) \times FOAR_{\text{hr}} ( S H − A H worked ​ ) × FO A R hr ​

Loading diagram... Complete Breakdown Hierarchy of Direct Labour and Factory Overhead Variances