Martin Company, which applies overhead to production on the basis of machine hours, reported the following data for the period just ended:
Actual units produced: 9,000
Actual variable overhead incurred: $54,400
Actual machine hours worked: 16,000
Standard variable overhead cost per machine hour: $3.50
If Martin estimates two hours to manufacture a completed unit, the company's variable-overhead efficiency variance is:
A) $1,600 favorable.
B) $1,600 unfavorable.
C) $7,000 favorable.
D) $7,000 unfavorable.
E) None of the other answers are correct.

Question

Quizplus · Accepted Answer

To calculate the variable-overhead efficiency variance, we need to compare the actual machine hours used to produce the actual units with the standard machine hours that should have been used based on the number of units produced.

The standard hours to produce the actual units is 2 hours per unit × 9,000 units = 18,000 hours.

The standard variable overhead cost for those hours is $3.50 per hour × 18,000 hours = $63,000.

The actual machine hours worked were 16,000, so the company saved 18,000 - 16,000 = 2,000 hours.

The efficiency variance is calculated as (standard variable overhead cost per hour × saved hours) - actual variable overhead cost incurred.

Substituting the numbers we get:

($3.50 × 2,000) - $54,400 = $7,000 favorable.

Therefore, the answer is C: $7,000 favorable.

Martin Company, Which Applies Overhead to Production on the Basis