The Maxit Corporation has a standard costing system in which variable manufacturing overhead is assigned to production on the basis of standard machine-hours. The following data are available for July:Actual variable manufacturing overhead cost incurred: $26,140Actual machine-hours worked: 3,200 hoursVariable overhead rate variance: $5,820 UnfavorableTotal variable overhead spending variance: $8,140 UnfavorableThe variable overhead efficiency variance for July is:
A) $2,320 Unfavorable
B) $13,960 Unfavorable
C) $13,960 Favorable
D) $2,320 Favorable

Question

Quizplus · Accepted Answer

The formula for the variable overhead efficiency variance is:
Variable Overhead Efficiency Variance = (Standard Hours Allowed for Actual Output – Actual Hours Worked) x Variable Overhead Rate

We are given the actual machine-hours worked as 3,200 hours. However, we are not given the standard hours allowed for actual output. Therefore, we cannot directly calculate the efficiency variance.

However, we are given the variable overhead rate variance, which is $5,820 unfavorable. This variance is caused by a difference between the actual variable overhead rate and the standard variable overhead rate.

To find the standard variable overhead rate, we can use the variable overhead spending variance:
Variable Overhead Spending Variance = Actual Variable Overhead – (Standard Variable Overhead Rate x Actual Machine-Hours)
$8,140 unfavorable = $26,140 – (Standard Variable Overhead Rate x 3,200)
Standard Variable Overhead Rate = $2.375 per machine-hour

Now we can use the variable overhead rate variance and the standard variable overhead rate to find the actual variable overhead rate:
Variable Overhead Rate Variance = Actual Machine-Hours x (Actual Variable Overhead Rate – Standard Variable Overhead Rate)
$5,820 unfavorable = 3,200 x (Actual Variable Overhead Rate – $2.375)
Actual Variable Overhead Rate = $3.35 per machine-hour

Finally, we can use the actual and standard variable overhead rates to find the variable overhead efficiency variance:
Variable Overhead Efficiency Variance = (Standard Hours Allowed for Actual Output – Actual Hours Worked) x Variable Overhead Rate
Variable Overhead Efficiency Variance = (Standard Hours Allowed for Actual Output – 3,200) x $3.35
Variable Overhead Efficiency Variance = (Standard Hours Allowed for Actual Output – 3,200) x ($2.375 + $0.975)

Since the variable overhead rate variance is unfavorable, the actual variable overhead rate is higher than the standard variable overhead rate. Therefore, the variable overhead efficiency variance will also be unfavorable. We can eliminate choices C and D as they provide favorable variances. We can also eliminate choice B as it provides an unrealistically high unfavorable variance. Therefore, the correct answer is A, $2,320 unfavorable.

The Maxit Corporation Has a Standard Costing System in Which