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What are planning and operational variances? How can variances be interdependent, and why does that matter? What are the limitations and criticisms of variance analysis and standard costing? How does variance analysis differ under marginal versus absorption costing? How do you interpret an operating statement under marginal costing? How do you compute and use a market size and market share variance? How do you reconcile standard cost of actual production to actual cost? How can variance analysis mislead in a JIT or lean environment? What is the total materials variance and how is it split, with a worked example? How does responsibility for variances get assigned across departments?
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Budgeting & Forecasting › Variance Analysis

How do you calculate the fixed overhead capacity and efficiency variances?

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Answer

Under absorption costing, the fixed overhead volume variance splits into: the capacity variance—(actual hours worked - budgeted hours) x standard fixed overhead rate—measuring whether capacity was used more/less than planned; and the efficiency variance—(standard hours for output - actual hours) x standard rate—measuring how efficiently that capacity produced output.
Capacity = (Actual hrs - Budget hrs) x OAR. Efficiency = (Std hrs - Actual hrs) x OAR.
Real-world example Working more hours than budgeted gives a favorable capacity variance, split from efficiency.

Common follow-ups: What does the capacity variance measure? | How does it relate to the volume variance?

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All 38 Variance Analysis questions