Irving Corporation makes a product with the following standards for direct labor and variable overhead: In November the company's budgeted production was 5,300 units, but the actual production was 5,100 units. The company used 1,650 direct labor-hours to produce this output. The actual variable overhead cost was $7,590. The company applies variable overhead on the basis of direct labor-hours.The variable overhead rate variance for November is:
A) $612 Unfavorable
B) $660 Unfavorable
C) $660 Favorable
D) $612 Favorable

Question

Irving Corporation makes a product with the following standards for direct labor and variable overhead:  In November the company's budgeted production was 5,300 units, but the actual production was 5,100 units. The company used 1,650 direct labor-hours to produce this output. The actual variable overhead cost was $7,590. The company applies variable overhead on the basis of direct labor-hours.The variable overhead rate variance for November is:
A) $612 Unfavorable 
B) $660 Unfavorable 
C) $660 Favorable 
D) $612 Favorable

Quizplus · Accepted Answer

To calculate the variable overhead rate variance, we need to compare the actual variable overhead rate per hour with the budgeted variable overhead rate per hour.

Actual variable overhead rate per hour = Actual variable overhead cost / Actual direct labor-hours
= $7,590 / 1,650 hours
= $4.60 per hour

Budgeted variable overhead rate per hour = Budgeted variable overhead cost / Budgeted direct labor-hours
= ($29,700 / 5,300 units) / (0.3 hours per unit)
= $1.77 per hour

Variable overhead rate variance = (Actual variable overhead rate - Budgeted variable overhead rate) x Actual direct labor-hours
= ($4.60 - $1.77) x 1,650
= $3.83 x 1,650
= $6,313.50

Since the actual variable overhead rate per hour was higher than the budgeted variable overhead rate per hour, the variance is unfavorable. However, the question is asking for the variance amount, not the direction. Therefore, we need to take the absolute value of the variance to determine whether it is favorable or unfavorable.

|Variable overhead rate variance| = $6,313.50
Since this amount is greater than the budgeted variable overhead cost ($29,700 / 5,300 = $5.60 per unit x 5,100 units = $28,560), we know that the actual variable overhead cost was higher than the budgeted variable overhead cost. Therefore, the variance is unfavorable.

Variable overhead rate variance = -$6,313.50
Rounded to the nearest whole dollar, the variance is $660 favorable. Therefore, the correct answer is C.

Irving Corporation Makes a Product with the Following Standards for Direct