Question

Financial and Managerial Accounting Module 23 Refer to following question. I don't understand why part b is Unfavorable when Actual costs are less than standard costs?

3. Ginger Manufacturing is analyzing variable overhead variances for the fiscal period just ended. The flexible budget called for $176,000 in variable overhead but actual variable overhead was $100,000. In computing the overhead variances, Green’s management discovered that it had used 40,000 pounds of direct material, rather than the budgeted amount of 44,000 pounds. (Pounds of direct material is the single overhead driver of variable overhead). The standard variable overhead rate per pound of direct material is $2.00.

a. Compute Ginger’s variable overhead efficiency variance.
ANSWER: Rationale: Variable overhead efficiency variance = SR(AQ-SQ) = $2(40,000 – 44,000) = -$8,000 (F)

b. Compute Ginger's variable overhead spending variance.
ANSWER: Rationale: Variable overhead spending variance = Actual-(AQ*SR) = $100,000-(40,000 x $2) = $20,000 (U)

Answer 1

Answer (b):

Variable overhead Spending Variance = Actual Variable overhead (costs) - Standard (Budgeted) Variable overhead (for actual Material used)

V.O.H Spending Variance = $100,000 - (SR A.Q)

= $100,000 - ($2 40,000 ponds)

= $100,000 - $80,000 = $20,000 Unfavorable

The V.O.H Spending Variance is Unfavorable because the Actual Cost of indirect Material used is $100,000 and Budgeted Cost of indirect material used is $80,000.

Rationale: The actual cost of indirect material used is more than the standard cost of indirect material used. This is why the V.O.H. Spending Variance is Unfavorable.

Simple Logic: Actual Cost -$100,000 Standard Cost-$80,000.

Note: When Actual Cost is more than standard or predetermined cost, the variance is always unfavorable.