Variable Overhead Variances Smith Tax Company considers 6,000 direct labor hours or 300 tax

returns its normal monthly capacity. Its standard variable overhead rate is $50 per direct labor hour.

During the current month, $250,400 of variable overhead cost was incurred in working 5,500 direct

labor hours to prepare 270 tax returns. Determine the following variances, and indicate whether each

is favorable or unfavorable:

a. Variable overhead spending

b. Variable overhead efficiency

a. $5,000 unfavorable

b. $24,600 favorable

Explanation:

The computations are shown below:

a. Variable overhead efficiency variance = Standard rate * (Standard hours - Actual hours)

where,

Standard variable overhead rate is $50

Actual hours is 5,500 direct labor hours

Standard hours is

= 6,000 : 300 * 270 = 5,400 direct labor hours

So, the Variable overhead efficiency variance is

= $50 * (5,400 direct labor hours - 5,500 direct labor hours)

= $50 * - 100 direct labor hours

= $5,000 unfavorable

b. And, variable overhead spending variance is

= (Actual hours * Standard rate) - Actual cost

= (5,500 hours * $50) - $250,400

= $275,000 - $250,400

= $24,600 favorable