Capacity of Utilization and the Efficiency Variance.

Abstract The article discusses the capacity of utilization and efficiency varience. Efficiency variance is analogous to the usual fixed overhead efficiency variance. The aim of this article is to clarify the framework and to appraise the place of an efficiency variance within that framework. Distinctions between effectiveness and efficiency are frequently very helpful in discussing planning and controlling. Effectiveness is the accomplishment of a desired objective. Efficiency is an optimum relationship between input and output. Efficiency is monitored by other means via the usual labor efficiency variances and similar variances that analyze variable cost factors. The use of an efficiency variance is helpful because it often explains why capacity was ineffectively utilized. However, for reasons explained in an earlier article, expressing the efficiency variance in terms of historical costs is objectionable. The association of the capacity efficiency variance with the expected idle capacity variance is an unnecessary direct link that may be more confusing than helpful.