Calculate a fixed-overhead efficiency sub-variance
Value the difference between standard hours allowed for actual output and actual hours at the fixed-overhead rate.
Section 4.2 · Standard costing
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. Topic 4.2 teaches standard costing, the listed material, labour, fixed-overhead and sales variances, their causes and relationships, and evidence-based business decisions. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use Topic 2.1–2.2 cost behaviour, contribution and absorption-costing ideas. In each question, identify the period, actual output, budget and standard before calculating a variance.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
What rate is used in the fixed-overhead efficiency sub-variance?
What you will learn
- Calculate standard hours allowed for output
- Apply the fixed-overhead efficiency formula
- Reconcile capacity and efficiency to volume
Compare hours needed with hours used
Fixed-overhead efficiency variance = (standard hours allowed for actual output − actual hours) × standard fixed-overhead absorption rate per hour. Fewer actual hours than the allowance are favourable under the absorption convention; extra hours are adverse.
It measures the absorption effect of how efficiently the actual output was made in hours. Use standard hours for actual output, not budgeted hours, and use the standard fixed-overhead rate rather than an actual hourly rate.
Efficiency variance = (SH allowed − AH) × standard FOH rate/hour
The sub-variances explain the volume variance
When calculated on a consistent basis, capacity variance plus efficiency variance equals fixed-overhead volume variance. Capacity compares actual hours with budgeted hours; efficiency compares standard hours allowed with actual hours.
A favourable efficiency result can accompany poor quality or unsafe pace. Check defects, rework, output mix and equipment condition before treating shorter time as better performance.
Pause and explain
SH allowed is 4,300; AH is 4,250; rate is $8/hour. What is the efficiency variance?
Worked example
Standard time is 2 hours per unit. Actual output is 3,000 units; actual hours are 6,200; standard fixed-overhead rate is $10/hour. Calculate the efficiency sub-variance.
Show the worked solution
- Allowed hours = 3,000 × 2 = 6,000.
- Actual hours exceed allowed hours by 200.
- 200 × $10 = $2,000 adverse.
Answer $2,000 adverse fixed-overhead efficiency variance.
Try a topic test
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Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Allowed hours are 7,200; actual hours are 7,350; standard overhead rate is $14/hour. Find the efficiency sub-variance.
Give me a hint
Actual hours exceed the standard allowance, reducing the absorption effect.
Compare my reasoning
- Difference = 7,200 − 7,350 = −150 hours.
- 150 × $14 = $2,100.
- The excess hours make the variance adverse.
$2,100 adverse.
Look for these in your work
- Use standard hours allowed
- Difference is 150 excess hours
- Value at standard overhead rate
A plant budgeted 10,000 hours. For actual output, standard hours allowed are 9,400; actual hours are 9,250; standard rate is $20/hour. Find both sub-variances and reconcile to volume.
Give me a hint
Capacity uses actual minus budgeted hours; efficiency uses allowed standard minus actual hours.
Compare my reasoning
- Capacity = (9,250 − 10,000) × $20 = $15,000 adverse.
- Efficiency = (9,400 − 9,250) × $20 = $3,000 favourable.
- Net = $12,000 adverse, equal to (9,400 − 10,000) × $20 volume variance.
Capacity $15,000 adverse plus efficiency $3,000 favourable equals volume $12,000 adverse.
Look for these in your work
- Capacity basis correct
- Efficiency basis correct
- Sub-variances reconcile to volume
A factory reports favourable fixed-overhead efficiency while defect rates rise. What should the operations manager do before celebrating?
Give me a hint
The time saving may hide rework, scrap or a quality-standard breach.
Compare my reasoning
- Confirm actual output and compare the defect rate with the approved quality limit.
- Measure rework, scrap and returns that may follow from shorter production time.
- Check whether the standard remains realistic and restore controls if quality is compromised.
The time variance is favourable only as an absorption measure. Review defects, scrap and rework before treating the process as improved.
Look for these in your work
- Defects measured
- Hidden rework considered
- Quality condition included
Common mistakes
- Using budgeted hours in this sub-variance
- Using the direct-labour wage rate
- Assuming a favourable efficiency amount proves safe, high-quality output
What can you explain now?
What is the hours basis for fixed-overhead efficiency variance?
Compare with the explanation
Standard hours allowed for actual output compared with actual hours
Efficiency uses the standard time for the output actually achieved.
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Make it stick
Show how capacity and efficiency sub-variances reconcile to fixed-overhead volume variance.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.