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CA Intermediate · Cost and Management Accounting · Standard Costing

Anand Engineering absorbs variable overheads at Rs 20 per labour hour. Budgeted output was 2,400 units at 5 hours per unit. Actual output was 2,500 units, taking 12,000 hours, with actual variable overheads of Rs 2,52,000. Which statement is correct?

Expenditure variance is Rs 12,000 Adverse and efficiency variance is Rs 10,000 Favourable. Actual hours at standard rate cost Rs 2,40,000 against actual spend of Rs 2,52,000, while 500 fewer hours than the standard 12,500 save Rs 10,000. Net is Rs 2,000 Adverse.

  1. AVariable overhead expenditure variance is Rs 12,000 Adverse and efficiency variance is Rs 10,000 FavourableCorrect
  2. BVariable overhead expenditure variance is Rs 12,000 Adverse and efficiency variance is Rs 10,000 Adverse
  3. CVariable overhead expenditure variance is Rs 2,000 Adverse and efficiency variance is Rs 10,000 Favourable
  4. DVariable overhead expenditure variance is Rs 12,000 Favourable and efficiency variance is Rs 10,000 Favourable

Explanation

Standard hours for actual output = 2,500 x 5 = 12,500. Absorbed at standard = 12,500 x 20 = Rs 2,50,000. Expenditure variance = 12,000 x 20 - 2,52,000 = 2,40,000 - 2,52,000 = Rs 12,000 Adverse. Efficiency = (12,500 - 12,000) x 20 = Rs 10,000 Favourable. Total = Rs 2,000 Adverse, matching 2,50,000 - 2,52,000.

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