Question

Shorts, Inc. produces small engines. For last year's operations, the following data were gathered:

Units produced:	100,000
Direct labor:	160,000 hours @ $12.00
Actual variable overhead:	$1,300,000

Shorts, Inc. employs a standard costing system. During the year, a variable overhead rate of $8.00 was used. The labor standard requires 1.5 hours per unit produced. The variable overhead spending and efficiency variances are, respectively

	a.	$100,000 U and $20,000 U.
	b.	$100,000 U and $20,000 F.
	c.	$20,000 U and $80,000 U.
	d.	$20,000 U and $80,000 F.
	e.	None of these.

Answer 1

The formula for variable overhead spending variance is:

Actual hours worked x (Actual overhead rate - standard overhead rate)

=160,000 × ({1,300,000/160,000} - 8)

= 160,000×(8.125 -8)

=20,000 Unfavourable

The formula for variable overhead efficiency variance is:

  (actual labor hours less budgeted labor hours) x hourly rate for standard variable overhead,.

= (160,000 - {100,000 × 1.5})*8

= 80,000 U

Thus, correct answer is Option:

C) $20,000 U and $80,000 U