Factory Overhead Idle Capacity Variance

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.
======

You may also be interested in other articles from “standard costing and variance analysis” chapter

  1. Standard Costs and Management By Exception
  2. Setting Standard Costs – Ideal Versus Practical Standards
  3. Direct Materials Price and Quantity Standards
  4. Direct Materials Price Variance
  5. Direct Materials Quantity Variance
  6. Direct Labor Rate and Efficiency Standards
  7. Direct Labor Rate/Price Variance
  8. Direct Labor Efficiency | Usage | Quantity Variance
  9. Manufacturing Overhead Standards
  10. Overall or net factory overhead variance.
  11. Controllable variance
  12. Volume variance
  13. Spending variance
  14. Idle capacity variance
  15. Efficiency variance
  16. Spending variance
  17. Variable efficiency variance
  18. Fixed efficiency variance
  19. Idle capacity variance
  20. Mix and Yield Variance – Definition and Explanation
  21. Materials Mix and Yield Variance
  22. Labor Yield Variance
  23. Factory Overhead Yield variance
  24. Variance Analysis and Management By Exception
  25. Managerial importance and usefulness of variance analysis
  26. Advantages and Disadvantages of Standard Costing System
  27. Standard Costing Discussion Questions and Answers
  28. Standard Costing and Variance Analysis Formulas
  29. Standard Costing and Variance Analysis Problems and Solution
  30. Standard Costing and Variance Analysis Case Study


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