14 THE VARIABLE OVERHEAD EFFICIENCY VARI-TO SUPPORT THE COMPANY’S S...

10-14 The variable overhead efficiency vari-

to support the company’s strategy, which is a

theory about what actions will further the com-

ance and the direct labor efficiency variance will

always be favorable or unfavorable together if

pany’s goals. Assuming that the company has

financial goals, measures of financial perform-

overhead is applied on the basis of direct labor-

ance must be included in the balanced scorecard

hours. Both variances are computed by compar-

as a check on the reality of the theory. If the

ing the number of direct labor-hours actually

internal business processes improve, but the

worked to the standard hours allowed. That is,

financial outcomes do not improve, the theory

in each case the formula is:

may be flawed and the strategy should be

Efficiency Variance = SR(AH – SH)

changed.

Only the “SR” part of the formula differs be-