This is the variable overhead efficiency variance ($2,400) divided by the difference between the budgeted number of direct labor hours for the budgeted production of 5,000 units (10,000 hours) and the actual hours of direct labor used to produce 4,500 units (9,600). This is incorrect for two reasons: 1. The budgeted number of direct labor hours used should be the flexible budget amount for the actual production, not the static budget amount; and 2. When this is solved using the Quantity Variance (or efficiency variance) formula with 10,000 as the Standard Quantity and the Standard Price as the unknown variable, it results in a negative value of $6.00 for the unknown variable, which is impossible. To illustrate: The Quantity Variance formula is (AQ ? SQ) × SP. Using 9,600 as the Actual Quantity, 10,000 as the Standard Quantity, a positive $2,400 as the variance and solving for the Standard Price as the variable, the equation is (9,600 ? 10,000) × SP = $2,400. Solving for SP, we get SP = ($6.00). It is not possible for the standard variable overhead rate per direct labor hour to be a negative number. The correct amount to use for the Standard Quantity in the variance formula is the amount of direct labor hours allowed for the actual production of 4,500 units. Using that amount in the Quantity Variance formula as SQ and solving for SP will result in the correct answer.
We can use the variable overhead efficiency variance formula, (AQ ? SQ) × SP, to find the answer to this. The unknown in that formula that we are looking for is SP, the standard rate. The question tells us that 9,600 direct labor hours were used, so that is the AQ in the formula. We can calculate the SQ, as follows: The standard is 10,000 hours of direct labor for the production of 5,000 units. Therefore, the standard for direct labor hours per unit is 10,000 ÷ 5,000, or 2 hours of DL per unit manufactured. Since 4,500 units were produced during June, the direct labor standard for those 4,500 units (SQ) was 4,500 × 2 = 9,000. The question also tells us that the variable overhead efficiency variance was $2,400 Unfavorable. We can now set up the formula: (AQ ? SQ) × SP = Variable Overhead Efficiency Variance (9,600 ? 9,000) × SP = 2,400 U (a positive variance is unfavorable in a cost item) Solving for SP: 600 SP = 2,400 SP = $4.00
This answer results from using the formula for the variable overhead spending variance to calculate the answer. The question says that the variable overhead efficiency variance was $2,400 unfavorable, and so the variable overhead efficiency variance formula should be used instead.
This is the actual incurred variable overhead of $39,360 divided by the actual number of direct labor hours used (9,600).
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