Question

Martin Company, which applies overhead to production on the basis of machine hours, reported the following data for the period just ended:

Actual units produced: 9,000
Actual variable overhead incurred: $54,400
Actual machine hours worked: 16,000
Standard variable overhead cost per machine hour: $3.50
If Martin estimates two hours to manufacture a completed unit, the company's variable-overhead efficiency variance is:
A. $1,600 favorable.
B. $1,600 unfavorable.
C. $7,000 favorable.
D. $7,000 unfavorable.
E. some other amount not listed above.

Answer 1

The variable-overhead efficiency variance for Martin Company is calculated by comparing the standard machine hours for actual production to the actual machine hours worked, and then multiplying the difference by the standard variable overhead rate. Martin Company has a favorable variance of $7,000, indicating efficient use of overhead resources in production.

Step-by-step explanation:

To calculate the variable-overhead efficiency variance, we first need to determine the standard amount of machine hours that should have been used for the actual production level. With two hours to manufacture a completed unit and an actual output of 9,000 units, the standard machine hours are 9,000 units * 2 hours/unit = 18,000 standard machine hours. With actual machine hours worked being 16,000 and a standard of 18,000 hours, Martin Company used 2,000 hours less than the standard.

The standard variable overhead cost per machine hour is given as $3.50. The efficiency variance is found by multiplying the difference in the machine hours by the standard overhead rate per machine hour: 2,000 hours * $3.50/hour = $7,000. Because Martin Company used fewer hours than the standard, this is a favorable variance.

Therefore, the company's variable-overhead efficiency variance is $7,000 favorable (Option C).