Pearce Company Pearce Company uses a standard cost system for its production process.Pearce Company applies overhead based on direct labor hours.The following information is available for July:

Standard:

DLH per unit 2.20

Variable overhead per DLH $2.50

Fixed overhead per DLH

Budgeted variable overhead $3.00

(based on 11,990 DLHs)

Actual:
Units produced 4,400

Direct labor hours 8,800

Variable overhead $29,950

Fixed overhead $42,300

Refer to Pearce Company Using the three-variance approach,what is the efficiency variance? A)$11,770 F B)$2,200 F C)$7,975 U D)$5,775 U

Question

Pearce Company Pearce Company uses a standard cost system for its production process.Pearce Company applies overhead based on direct labor hours.The following information is available for July:

Standard:
DLH per unit	2.20
Variable overhead per DLH	$2.50
Fixed overhead per DLH
Budgeted variable overhead	$3.00
(based on 11,990 DLHs)

Actual:
Units produced	4,400
Direct labor hours	8,800
Variable overhead	$29,950
Fixed overhead	$42,300

Refer to Pearce Company Using the three-variance approach,what is the efficiency variance? A)$11,770 F B)$2,200 F C)$7,975 U D)$5,775 U

Quizplus · Accepted Answer

The efficiency variance is calculated as the difference between the actual direct labor hours used and the standard direct labor hours allowed for the actual output, multiplied by the standard variable overhead rate per direct labor hour. The standard direct labor hours allowed for the actual output (4,400 units) is 4,400 units * 2.20 DLH/unit = 9,680 DLH. The actual direct labor hours used are 8,800 DLH. The standard variable overhead rate is $2.50 per DLH. Therefore, the efficiency variance is (9,680 DLH - 8,800 DLH) * $2.50/DLH = 880 DLH * $2.50/DLH = $2,200 favorable, because using fewer labor hours than expected is favorable.

Pearce Company Pearce Company Uses a Standard Cost System for Its Production