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CMA Intermediate · Management Accounting · Standard Costing and Variance Analysis (Management Accounting)

Desai Auto Ltd. applies variable overhead at Rs 12 per direct labour hour. Standard hours for actual output were 3,000. Actual hours worked were 2,800, and actual variable overhead was Rs 34,000. Which statement is correct?

Efficiency variance is Rs 2,400 Favourable because 200 fewer hours than standard were used at Rs 12. Expenditure variance is Rs 400 Adverse because Rs 34,000 was spent against Rs 33,600 allowed for 2,800 hours. The net variance is Rs 2,000 Favourable.

  1. AEfficiency variance Rs 2,400 Favourable; expenditure variance Rs 400 AdverseCorrect
  2. BEfficiency variance Rs 2,400 Adverse; expenditure variance Rs 400 Favourable
  3. CEfficiency variance Rs 2,400 Favourable; expenditure variance Rs 400 Favourable
  4. DEfficiency variance Rs 2,000 Favourable; expenditure variance Rs 400 Adverse

Explanation

Efficiency = 12 x (3,000 - 2,800) = Rs 2,400 Favourable. Expenditure = 12 x 2,800 = 33,600 versus actual 34,000 = Rs 400 Adverse. Total = 2,000 Favourable, matching 36,000 - 34,000.

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