 Financial Terms variable overhead efficiency variance

# Definition of variable overhead efficiency variance the difference between budgeted variable overhead based on actual input activity and variable overhead applied to production

# Related Terms:

the difference between total budgeted overhead at actual hours and total budgeted
overhead at standard hours allowed for the production
achieved; it is computed as part of a three-variance analysis;
it is the same as variable overhead efficiency variance

the amount of overhead that has been assigned to Work in Process Inventory as a result of productive activity; credits for this amount are to an overhead account

## budget variance

the difference between total actual overhead
and budgeted overhead based on standard hours allowed
for the production achieved during the period; computed
as part of two-variance overhead analysis; also
referred to as the controllable variance

## Capital market efficiency

Reflects the relative amount of wealth wasted in making transactions. An efficient
capital market allows the transfer of assets with little wealth loss. See: efficient market hypothesis.

## Continuous random variable

A random value that can take any fractional value within specified ranges, as
contrasted with a discrete variable.

## controllable variance

the budget variance of the two variance approach to analyzing overhead variances

## Covariance

A statistical measure of the degree to which random variables move together. ## Covariance

A measure of the degree to which returns on two assets move in
tandem. A positive covariance means that asset returns move together; a
negative covariance means they vary inversely.

## decision variable

an unknown item for which a linear programming
problem is being solved

## dependent variable

an unknown variable that is to be predicted
using one or more independent variables

## Direct materials mix variance

The variance between the budgeted and actual mixes of
direct materials costs, both using the actual total quantity used. This variance isolates
the unit cost of each item, excluding all other variables.

## Discrete random variable

A random variable that can take only a certain specified set of discrete possible
values - for example, the positive integers 1, 2, 3, . . .

## Efficiency

Reflects the amount of wasted energy.

## efficiency

a measure of the degree to which tasks were performed
to produce the best yield at the lowest cost from
the resources available; the degree to which a satisfactory
relationship of outputs to inputs occurs

## Efficiency

The ability to produce the things most wanted at the least cost.

## Efficiency Wage

Wage that maximizes profits. ## Endogenous variable

A value determined within the context of a model.

## Exogenous variable

A variable whose value is determined outside the model in which it is used. Also called
a parameter.

## External efficiency

Related: pricing efficiency.

All the costs incurred during the manufacturing process, minus the
costs of direct labor and materials.

That portion of total overhead costs which remains constant in size
irrespective of changes in activity within a certain range.

the difference between the total actual fixed overhead and budgeted fixed overhead;
it is computed as part of the four-variance overhead analysis

see volume variance

## independent variable

a variable that, when changed, will
cause consistent, observable changes in another variable;
a variable used as the basis of predicting the value of a
dependent variable

## Informational efficiency

The speed and accuracy with which prices reflect new information.

## key variable

a critical factor that management believes will
be a direct cause of the achievement or nonachievement
of the organizational goals and objectives

## labor efficiency variance

the number of hours actually worked minus the standard hours allowed for the production
achieved multiplied by the standard rate to establish
a value for efficiency (favorable) or inefficiency (unfavorable)
of the work force ## Labor efficiency variance

The difference between the amount of time that was budgeted
to be used by the direct labor staff and the amount actually used, multiplied
by the standard labor rate per hour.

## labor mix variance

(actual mix X actual hours X standard rate) - (standard mix X actual hours X standard rate);
it presents the financial effect associated with changing the
proportionate amount of higher or lower paid workers in production

## labor rate variance

the actual rate (or actual weighted average rate) paid to labor for the period minus the standard rate multiplied by all hours actually worked during the period;
it is actual labor cost minus (actual hours X standard rate)

## Labor rate variance

The difference between the actual and standard direct labor rates
actually paid to the direct labor staff, multiplied by the number of actual hours
worked.

## labor yield variance

(standard mix X actual hours X standard rate) - (standard mix X standard hours X standard rate);
it shows the monetary impact of using more or fewer total hours than the standard allowed

## manufacturing cycle efficiency (MCE)

a ratio resulting from dividing the actual production time by total lead time;

See efficiency.

## Marketplace price efficiency

The degree to which the prices of assets reflect the available marketplace
information. Marketplace price efficiency is sometimes estimated as the difficulty faced by active
management of earning a greater return than passive management would, after adjusting for the risk
associated with a strategy and the transactions costs associated with implementing a strategy.

## material mix variance

(actual mix X actual quantity X standard price) - (standard mix X actual quantity X standardprice);
it computes the monetary effect of substituting a nonstandard mix of material

## material price variance

total actual cost of material purchased
minus (actual quantity of material  standard
price); it is the amount of money spent below (favorable)
or in excess (unfavorable) of the standard price for the
quantity of materials purchased; it can be calculated based
on the actual quantity of material purchased or the actual
quantity used

## material quantity variance

(actual quantity X standard price) - (standard quantity allowed  standard price);
the standard cost saved (favorable) or expended (unfavorable)
due to the difference between the actual quantity
of material used and the standard quantity of material
allowed for the goods produced during the period

## material yield variance

(standard mix X actual quantity X standard price) - (standard mix X standard quantity X standard price);
it computes the difference between the
actual total quantity of input and the standard total quantity
allowed based on output and uses standard mix and
standard prices to determine variance

## Materials price variance

The difference between the actual and budgeted cost to
acquire materials, multiplied by the total number of units purchased.

## Materials quantity variance

The difference between the actual and budgeted quantities
of material used in the production process, multiplied by the standard cost per
unit.

## Mean-variance analysis

Evaluation of risky prospects based on the expected value and variance of possible outcomes.

## Mean-variance criterion

The selection of portfolios based on the means and variances of their returns. The
choice of the higher expected return portfolio for a given level of variance or the lower variance portfolio for
a given expected return.

## Mean-variance efficient portfolio

Related: Markowitz efficient portfolio

## Minimum-variance frontier

Graph of the lowest possible portfolio variance that is attainable for a given
portfolio expected return.

## Minimum-variance portfolio

The portfolio of risky assets with lowest variance.
Minority interest An outside ownership interest in a subsidiary that is consolidated with the parent for
financial reporting purposes.

A general term referring to period costs, such as selling, administration and financial expenses.

## noncontrollable variance

it is computed as part of the two-variance approach to overhead analysis

## Normal random variable

A random variable that has a normal probability distribution.

a credit balance in the overhead account
at the end of a period; when the applied overhead
amount is greater than the actual overhead that was incurred

Any cost other than a direct cost – may refer to an indirect production cost and/or to a non-production expense.

any factory or production cost that is indirect to
the product or service; it does not include direct material
or direct labor; any production cost that cannot be directly
traced to the product

The process of spreading production overhead equitably over the volume of production of goods or services.

overhead generally refers to indirect, in contrast to direct,
costs. Indirect means that a cost cannot be matched or coupled in any
obvious or objective manner with particular products, specific revenue
sources, or a particular organizational unit. Manufacturing overhead
costs are the indirect costs in making products, which are in addition to
the direct costs of raw materials and labor. Manufacturing overhead
costs include both variable costs (electricity, gas, water, etc.), which vary
with total production output, and fixed costs, which do not vary with
increases or decreases in actual production output.

The rate (often expressed per hour) applied to the time taken to produce a product/service, used to allocate production overheads to particular products/services based on the time taken. May be calculated on a business-wide or cost centre basis.

the difference between total actual overhead and total budgeted overhead at actual
hours; it is computed as part of three-variance analysis; it
is equal to the sum of the variable and fixed overhead
spending variances

## Portfolio variance

Weighted sum of the covariance and variances of the assets in a portfolio.

an estimated constant charge per unit of activity used to assign overhead cost to production or services of the period; it is calculated by dividing total budgeted annual overhead at a selected level of volume or activity by that selected measure of volume or activity; it is also the standard overhead application rate

## Pricing efficiency

Also called external efficiency, a market characteristic where prices at all times fully
reflect all available information that is relevant to the valuation of securities.

A general term referring to indirect costs.

## Production yield variance

The difference between the actual and budgeted proportions
of product resulting from a production process, multiplied by the standard unit cost.

## Random variable

A function that assigns a real number to each and every possible outcome of a random experiment.

## Selling price variance

The difference between the actual and budgeted selling price for
a product, multiplied by the actual number of units sold.

## Semi-strong form efficiency

A form of pricing efficiency where the price of the security fully reflects all
public information (including, but not limited to, historical price and trading patterns). Compare weak form
efficiency and strong form efficiency.

## semi-strong-form efficiency

Market prices reflect all publicly available information.

## Semi-variable costs

Costs that have both fixed and variable components.

## Serial covariance

The covariance between a variable and the lagged value of the variable; the same as
autocovariance.

## slack variable

a variable used in a linear programming problem
that represents the unused amount of a resource at
any level of operation; it is associated with less-than-orequal-
to constraints

a predetermined overhead rate used in a standard cost system; it can be a separate variable or fixed rate or a combined overhead rate

## Strong-form efficiency

Pricing efficiency, where the price of a, security reflects all information, whether or
not it is publicly available. Related: Weak form efficiency, semi strong form efficiency

## strong-form efficiency

Market prices rapidly reflect all information that could in principle be used to determine true value.

## surplus variable

a variable used in a linear programming problem that represents overachievement of a minimum requirement; it is associated with greater-than-or-equal-to constraints

the difference between total actual overhead and total applied overhead; it is the amount of underapplied or overapplied overhead

## total variance

the difference between total actual cost incurred
and total standard cost for the output produced during
the period

a debit balance in the overhead account at the end of a period; when the applied overhead amount is less than the actual overhead that was incurred

## Variable

A value determined within the context of a model. Also called endogenous variable.

## Variable annuities

Annuity contracts in which the issuer pays a periodic amount linked to the investment
performance of an underlying portfolio.

## Variable Annuity

A form of annuity policy under which the amount of each benefit is not guaranteed or specified. The amounts fluctuate according to the earnings of a separate investment account.

## Variable cost

A cost that is directly proportional to the volume of output produced. When production is zero,
the variable cost is equal to zero.

## Variable cost

A cost that increases or decreases in proportion with increases or decreases in the volume of production of goods or services.

## variable cost

a cost that varies in total in direct proportion
to changes in activity; it is constant on a per unit basis

## Variable cost

A cost that changes in amount in relation to changes in a related activity.
variance
The difference between an actual measured result and a basis, such as a budgeted amount.

## variable cost ratio

the proportion of each revenue dollar
represented by variable costs; computed as variable costs
divided by sales or as (1 - contribution margin ratio)

## Variable costing

A method of costing in which only variable production costs are treated as product costs and in which all fixed (production and non-production) costs are treated as period costs.

## variable costing

a cost accumulation and reporting method
that includes only variable production costs (direct material,
direct labor, and variable overhead) as inventoriable
or product costs; it treats fixed overhead as a period cost;
is not acceptable for external reporting and tax returns

## variable costs

Costs that change as the level of output changes.

## VARIABLE EXPENSES

Those that vary with the amount of goods you produce or sell. These may include utility bills, labor, etc.

## variable expenses

Expenses that change with changes in either sales volume
or sales revenue, in contrast to fixed expenses that remain the same
over the short run and do not fluctuate in response to changes in sales
expenses.

## Variable life insurance policy

A whole life insurance policy that provides a death benefit dependent on the
insured's portfolio market value at the time of death. Typically the company invests premiums in common
stocks, and hence variable life policies are referred to as equity-linked policies.

the difference between total actual variable overhead and the budgeted amount of variable overhead based on actual input activity

## Variable price security

A security, such as stocks or bonds, that sells at a fluctuating, market-determined price.

## Variable rate CDs

Short-term certificate of deposits that pay interest periodically on roll dates. On each roll
date, the coupon on the CD is adjusted to reflect current market rates.

## Variable rate loan

Loan made at an interest rate that fluctuates based on a base interest rate such as the
Prime Rate or LIBOR.

## Variable rated demand bond (VRDB)

Floating rate bond that can be sold back periodically to the issuer.

## Variance

A measure of dispersion of a set of data points around their mean value. The mathematical
expectation of the squared deviations from the mean. The square root of the variance is the standard deviation.

## Variance

The weighted average of the squared deviations from the
expected value

## variance

a difference between an actual and a standard or
budgeted cost; it is favorable if actual is less than standard
and is unfavorable if actual is greater than standard

## Variance

The dispersion of a variable. The square of the standard deviation.