Question

If the Variable Manufacturing Overhead is allocated based on direct labor hour and the Efficiency Variance is unfavorable, this means that:

		A. The company used more overhead than budgeted
		B. The company used more direct labor than budgeted
		C. The company used less overhead than budgeted
		D. The company paid more for overhead items, such as shop rags

Answer 1

Solution: The answer is B. The company used more direct labor than budgeted.

Explanation:

Efficiency variance is the difference between the amount of inputs required and the actual number of inputs used to produce a unit of output.

If actual labor hours are used more than the budgeted labor hours then the efficiency variance is unfavorable. But if actual labor hours are used less than the budgeted then the variance is favourable.

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