Question

If overhead is applied to production using direct labor hours and the direct labor efficiency variance is favorable, then the variable overhead efficiency variance is:

favorable

unfavorable

either favorable or unfavorable.

neither favorable nor unfavorable.

Answer 1

If overhead is applied on the basis of direct labor hours, then the variable overhead efficiency variance and the direct labor efficiency variance will always be favorable or unfavorable together. Both variances are computed by comparing the number of direct labor hours actually worked to the standard hours allowed. The formula in each case is :-

Efficiency variance = (Standard Hours - Actual Hours)*Standard Rate

Only the standard rate differs between the two variances.

Therefore if the direct labor efficiency variance is favorable, then the variable overhead efficiency variance will also be favorable. Hence the correct option is a) Favorable