Question

Hamilton Pty Ltd uses a standard costing system for product costing. The company uses direct labour hours as the cost driver to apply overhead costs. The following amounts were budgeted for the year:

Planned production—units		50 000
Direct labour hours		200 000
Variable overhead	$	1 000 000
Fixed overhead	$	600 000

The following were the actual results

Actual production—units		48 000
Direct labour hours		195 000
Variable overhead	$	950 000
Fixed overhead	$	610 000

Calculate the amount of variable overhead efficiency variance

Answer 1

Solution: Variable overhead efficiency variance = (Standard hours for Actual Output - Actual hours) * Standard Variable Overhead rate per hour

According to the question

Budgeted production = 50,000 units

Budgeted Hours = 200,000 hours

Budgeted Variable Overhead = $1,000,000

Actual production = 48,000 units

Actual Hours = 195,000 hours

Actual Variable Overhead = $950,000

Standard Variable Overhead rate per hour = Budgeted variable overhead / Budgeted hours

= $1,000,000 / 200,000 = $5 per hour

Standard Hours for Actual Output = Budgeted Hours * (Actual production / Budgeted production)

= 200,000 hours * (48,000 / 50,000)

= 200,000 hours * 0.96 = 192,000 hours

Then,

Variable overhead efficiency variance = (192,000 hours - 195,000 hours) * $5 per hour

= -$15,000 or $15,000 Adverse

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