Overhead Efficiency Variance Calculator
Answers the Question
How much more did we pay workers than we had expected?
Calculator for Overhead Efficiency Variance
What Is the Overhead Efficiency Variance?
This formula provides a figure that can be used to determine the accuracy of the estimates for overhead costs.
Why Is it Important?
- It is critical to know if labor estimates are accurate so that managers know how much weight to put on them (and buffer to keep in reserve) for future planning purposes. It is also useful for determining whether future cuts will be required, as dictated by working capital.
Formula(s) to Calculate Overhead Efficiency Variance
- OVERHEAD EFFICIENCY VARIANCE = HOURLY RATE * (ACTUAL LABOR HOURS - ESTIMATED LABOR HOURS)
Common Mistakes
- Not considering whether unplanned value has been delivered by the staff members. A doubling of actual costs may not be too concerning if the value delivered has been tripled.
- Assuming that hourly pay remains constant. Wages tend to rise over time, and sometimes short-term contractors will cost more than long-term employees.
- Not accurately measuring labor costs (for instance, forgetting to include the cost of benefits).