Question

Tharaldson Corporation makes a product with the following standard costs: Standard Quantity or Hours Standard Price or Rate Standard Cost Per Unit Direct materials 5.5 ounces $ 2.00 per ounce $ 11.00 Direct labor 0.4 hours $ 11.00 per hour $ 4.40 Variable overhead 0.4 hours $ 8.00 per hour $ 3.20 The company reported the following results concerning this product in June. Originally budgeted output 4,100 units Actual output 4,100 units Raw materials used in production 20,500 ounces Purchases of raw materials 21,600 ounces Actual direct labor-hours 550 hours Actual cost of raw materials purchases $ 42,800 Actual direct labor cost $ 14,100 Actual variable overhead cost $ 4,050 The company applies variable overhead on the basis of direct labor-hours. The direct materials purchases variance is computed when the materials are purchased. The variable overhead efficiency variance for June is:

Answer 1

The formulae to find out Variable Overhead Efficiency Variance is

=(Standard hours for Actual Output- Actual Hours for Actual Output)* Standard rate for budgeted ouput

From the given question we can collate the following data;

Standard output produced =4100 units

Actual output produced    =4100 units

Standard variable hr for 1 unit =0.4 hours

therefore, Standard variable hr for 4100 units

   = 4,100*0.4 =1640 hours

Actual hours for 4100 units =550 hours (the company applies variable overhead on the basis of labor hours, therefore total labor hours worked is 550 hours which is taken as total variable hours also)

Standard rate for variable overhead=$8

therefore variable overhead efficiency variance =

=(Standard hours for Actual Output- Actual Hours for Actual Output)* Standard rate for budgeted ouput

=(1640-550)*8 =8720 Favorable

Note: The variance is favorable since the actual hours taken is less than the standard budgeted hours. Hence it is highly efficienct. Therefore it is a favorable variance