Question

The following information relating to a company's overhead costs is available.

Actual total variable overhead $73,000
Actual total fixed overhead $17,000
Budgeted variable overhead rate per machine hour $2.50
Budgeted total fixed overhead $15,000
Budgeted machine hours allowed for actual output 30,000

Based on this information, the total variable overhead variance is:

$2,000 favorable.
$6,000 favorable.
$2,000 unfavorable.
$6,000 unfavorable.
$1,000 favorable.

Answer 1

The total variable overhead variance is calculated as the difference between the actual variable overhead and the budgeted variable overhead based on actual activity. With actual costs being $2,000 less than budgeted costs, the variance is $2,000 favorable.

Step-by-step explanation:

To calculate the total variable overhead variance, we need to compare the actual variable costs with the budgeted variable costs for the actual level of activity. First, we calculate the budgeted variable overhead for the actual machine hours used:

Budgeted variable overhead = Budgeted variable overhead rate per machine hour × Budgeted machine hours allowed for actual output

Budgeted variable overhead = $2.50 × 30,000 = $75,000

Now we compare this with the actual total variable overhead:

Actual total variable overhead = $73,000

Variance = Actual total variable overhead - Budgeted variable overhead

Variance = $73,000 - $75,000 = -$2,000

A negative variance indicates that the actual costs were lower than the budgeted costs, hence, we have a $2,000 favorable variance.

Answer 2

$2,000 favorable

Step-by-step explanation:

We know,

Total variable overhead variance = Actual variable overhead cost - (Actual machine hour x Standard variable overhead rate)

Given,

Actual total variable overhead = $73,000

Budgeted variable overhead rate per machine hour = $2.50 (It is standard variable overhead rate)

Budgeted machine hours allowed for actual output = 30,000 hour (since there is no actual hour, and the budgeted machine hours used to produce actual output, it will be our actual machine hours)

Hence, putting all the values in the above formula,

Total variable overhead variance = $73,000 - (30,000 hours x $2.50)

Total variable overhead variance = $73,000 - $75,000

Total variable overhead variance = $2,000 (Favorable)

As actual cost is less than budgeted cost, it is favorable situation.