Question

When machine-hours are used as a cost-allocation base, the item most likely to contribute to a favorable variable overhead efficiency variance is:

Select one:

a. Purchase a new purchase at a lower cost

b. the production manager’s impressive scheduling of machines

c. higher demand for the product

d. a decline in the cost of energy

Answer 1

Ans:

When machine-hours are used as a cost-allocation base, the item most likely to contribute to a favorable variable overhead efficiency variance is a decline in the cost of energy, because for different jobs, manager of each job will try to allocate least overheads to show higher profit for their job.

We can better understand with a example.

Suppose we have 3 jobs A, B & C. Each job currently require 5, 2 & 3 hours of machine hour per unit. Total overhead cost lets assume be $100,000. So costs will be allocated to JOB A, B & C are $50,000 , $20,000 & $30,000. So now each job manager will try to increase the efficiency towards usage of machine hours so least cost will be allocated to their job. Which will help in reducing the expected machine hour required for each job, which therefore will result in the decline in cost of energy.