Factory Overhead Idle Capacity Variance:

Learning Objective of the article:

1. Define and explain factory overhead idle capacity variance.
2. How is FOH idle capacity variance calculated?
3. What are the reasons of unfavorable idle capacity variance

Definition and Explanation:

Factory overhead idle capacity variance is the difference between the budget allowance based on actual hours worked and actual hours worked multiplied by standard rate.

The idle capacity variance indicates the amount of overhead that is either under – or over absorbed because actual hours are either less or more than the hours on which the overhead rate was based. This variance is the responsibility of executive management.

Formula of Idle Capacity Variance:

Following formula/equation is used for the calculation of factory overhead idle capacity variance:

[Budgeted allowance based on actual hours worked* – (Actual hours worked × Standard overhead rate)]

*Fixed expenses budgeted + Variable expenses (actual hours worked ×  variable overhead rate)

Example:

Following is the flexible budget of a department of a manufacturing company.

 Department 3 Monthly Flexible Budget Capacity 80% 90% 100% Standard production 800 1,000 1,200 Direct labor hours 3,200 4,000 4,800 Variable factory overhead: Indirect labor \$1,600 \$2,000 \$2,400 \$0.50 / dlh Indirect materials 960 1,200 1,440 \$0.30 Supplies 640 800 960 \$0.20 Repairs 480 600 720 \$0.15 Power and light 160 200 240 \$0.05 ———– ———– ———– ———– Total variable factory overhead \$3,840 \$4,800 \$5,760 \$1.20 per dlh ====== ====== ====== ====== Fixed factory overhead: Supervisor \$1,200 \$1,200 \$1,200 Depreciation on machinery 700 700 700 Insurance 250 250 250 Property tax 250 250 250 Power and light 400 400 400 Maintenance 400 400 400 ———– ———– ———– Total fixed factory overhead \$3,200 \$3,200 \$3,200 \$3,200 per month ———– ———– ———– ====== Total factory overhead \$7,040 \$8,000 \$8,960 \$3,200 per month + \$1.20 per dlh ====== ====== ====== ======

Following data is also provided:

Actual factory overhead is \$7,384. Actual production is 850 units of finished product. Actual hours used are 3,475 hours. 4 standard hours are allowed to complete a unit of finished product.

Required: Calculate factory overhead idle capacity variance.

Calculation of Standard Overhead Rate:

Assuming that 90% column represents normal capacity, the standard overhead rate is computed as follows:

Total variable factory overhead / Direct labor hours

= \$8,000 / 4,000

= \$2 per standard direct labor hour

At 90% capacity level, the rate consists of:

Total variable factory overhead / Direct labor hours

= \$4,800 / 4,000

= \$1.20 variable factory overhead rate

Total fixed overhead / Direct labor hours

= \$3,200 / 4,000

= \$0.80 fixed factory overhead rate

Total factory overhead rate at normal capacity:

(\$1.20 + \$0.80) = \$2.00

Calculation of factory overhead idle capacity variance:

 Budgeted allowance based on actual hours worked: Fixed expenses budgeted \$3,200 Variable expenses (3,475 actual hours worked × \$1.20 variable overhead rate) \$4,170 ———– \$7,370 Actual hours worked × Standard overhead rate (3,475 actual hours × 2 standard hours) \$6,950 ———– Unfavorable overhead Idle capacity variance \$420 unfav.

Idle capacity variance consists of fixed expenses only and can also be computed as follows:

 Normal capacity 4,000 hours actual hours worked 3,475 hours ———— Difference 525 hours ———— Unfavorable Idle capacity variance (525 hours × 0.80 fixed rate) \$420 unfav. ======