The Ferris Company applies manufacturing overhead costs to products on the basis of standard direct labor-hours. The standard cost card shows that 3 direct labor-hours are required per unit of product. For August, the company budgeted to work 90,000 direct labor-hours and to incur the following total manufacturing overhead costs: During August, the company completed 28,000 units of product, worked 86,000 direct labor-hours, and incurred the following total manufacturing overhead costs: The denominator activity in the predetermined overhead rate is 90,000 direct labor-hours.
-For August, the variable overhead efficiency variance is:
A) $1,800 F
B) $0
C) $2,200 U
D) $2,200 F

Question

The Ferris Company applies manufacturing overhead costs to products on the basis of standard direct labor-hours. The standard cost card shows that 3 direct labor-hours are required per unit of product. For August, the company budgeted to work 90,000 direct labor-hours and to incur the following total manufacturing overhead costs:  During August, the company completed 28,000 units of product, worked 86,000 direct labor-hours, and incurred the following total manufacturing overhead costs:  The denominator activity in the predetermined overhead rate is 90,000 direct labor-hours.
-For August, the variable overhead efficiency variance is:
A) $1,800 F 
B) $0 
C) $2,200 U 
D) $2,200 F

Quizplus · Accepted Answer

The variable overhead efficiency variance measures the difference between the actual direct labor-hours worked and the standard direct labor-hours allowed for the actual output produced, multiplied by the variable overhead rate.

Variable overhead efficiency variance = (Actual hours - Standard hours allowed) x Variable overhead rate

In this case, the actual direct labor-hours worked were 86,000, and the standard direct labor-hours allowed were 28,000 units x 3 hours/unit = 84,000 hours. Therefore, the variable overhead efficiency variance is:

(86,000 - 84,000) x ($42,000 / 86,000) = $2,200 U

So, the best choice is C) $2,200 U.

The Ferris Company Applies Manufacturing Overhead Costs to Products on the Basis