Question

The difference between the total actual overhead cost incurred during a period and budgeted total factory overhead cost for the actual quantity of the cost driver used to apply overhead is equal to the:

A: Total overhead spending variance.
B: Total overhead efficiency variance.
C: Factory overhead production-volume variance.
D: Total overhead rate variance.
E: Total overhead variance.

Answer 1

The difference between total actual overhead cost incurred and budgeted overhead cost for the actual volume of cost driver used is the Total overhead spending variance. The average fixed cost curve indicates per-unit costs decline with increased production, showing 'spreading the overhead'.

Step-by-step explanation:

The correct option is A:

The discrepancy between the total actual overhead cost and the budgeted total factory overhead cost for the actual quantity of the cost driver utilized is known as the Total overhead variance. It encompasses all variations: the spending variance, efficiency variance, production-volume variance, and rate variance. However, if we are looking at the difference between the actual costs incurred and the budgeted costs based on the actual activity level, then this particular difference is referred to as the Total overhead spending variance (option A).

Total overhead variance is a measure that compares the actual overhead costs to the budgeted overhead costs. It helps in evaluating the effectiveness of cost control and identifying areas where costs are different from what was planned.Fixed costs, also known as overhead costs, do not change with the level of production. If a company has a fixed cost of $1,000, dividing this by the quantity of output produced results in the average fixed cost. This average fixed cost curve would decrease as production increases, illustrating the concept of spreading the overhead, where per-unit fixed costs decrease as more units are produced.