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ACCA Applied Knowledge · Management Accounting · Variance calculations and analysis

A company absorbs variable production overheads on the basis of direct labour hours. Which statement about the variable overhead efficiency variance is correct?

The variable overhead efficiency variance arises from the same cause as the labour efficiency variance when overheads are absorbed per labour hour. Both compare actual hours worked with standard hours allowed for actual output; the overhead version values the difference at the standard overhead rate.

  1. AIt arises from the same cause as the direct labour efficiency variance, because both depend on actual hours compared with standard hours for actual outputCorrect
  2. BIt arises because the price paid per hour of variable overhead differs from the standard rate
  3. CIt arises because actual production volume differs from budgeted production volume
  4. DIt arises only when overheads are absorbed on machine hours rather than labour hours

Explanation

When variable overheads are absorbed per labour hour, the efficiency variance is calculated from the difference between actual hours and standard hours for actual output, valued at the standard overhead rate. This is the same hours difference as in the labour efficiency variance. Price differences belong in the expenditure variance.

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