[Anonymous]

Does anyone know how to post a picture of a diagram in the forum? This question has a diagram in it but it won’t paste. The question is below. I have looked at this questions again and again and can’t seem to get it.

Thanks for your help.

The diagram below depicts a factory overhead flexible budget line DB and standard overhead application line OA. Activity is expressed in machine hours, with point V indicating the standard hours required for the actual output. Point S indicates the actual machine hours (inputs) and actual costs.

Are the volume (capacity) variance and efficiency variance favorable or unfavorable?

A.

Volume, favorable; Efficiency, unfavorable

B.

Volume, favorable; Efficiency, favorable

C.

Volume, unfavorable; Efficiency, unfavorable

D.

Volume, unfavorable; Efficiency, favorable

Answer:

The overhead volume variance is the difference between the budgeted amount of fixed overhead and fixed overhead applied. At level V, more overhead has been applied based on the predetermined application rate than the standard overhead for that level of activity. Therefore, good units produced must have been more than the expected normal volume, resulting in a favorable volume variance.

The overhead efficiency variance is part of the overhead budget variance. The overhead efficiency variance is the variance in applied overhead that results from variation in the application base (e.g., if overhead is allocated on the basis of machine hours, the overhead efficiency variance reflects the difference between actual machine hours and standard machine hours). Point S indicates that actual machine hours were greater than the standard machine hours (point V), indicating that the efficiency variance is unfavorable.