Question

Direct labor hours are used as the basis for applying manufacturing overhead. This past month, the direct labor efficiency variance was $400 U and the direct labor rate variance was $2,000 F. This was based on an actual rate of $18 per hour, a standard wage rate of $20 per hour, 1,000 actual hours worked and 980 standard hours expected for the amount of output. This would imply that the variable overhead efficiency variance was:

a. Favorable

b. Unfavorable

c. Not enough info to tell

Answer 1

Answer

b. Unfavorable

Explanation:

Direct Labor Efficiency Variance = (Standard hours - Actual hours) * Standard rate

As per the question, Direct Labor Efficiency Variance is unfavorable (i.e 400 U). This clearly means that the actual hours were more than the standard hours. That is why it was unfavorable.

Now,

Variable Overhead Efficiency Variance = (Standard hours - Actual hours) * Standard variable overhead rate

Now, we know that the actual hours are more than the standard hours. So, Variable Overhead Efficiency Variance is unfavorable.

In case of any doubt or clarification, you're welcome to come back via comments.