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

Iyer Metals Ltd. has these figures: standard variable overhead Rs 8 per unit; actual output 5,000 units; actual variable overhead Rs 43,500. Standard hours allowed are 2 hours per unit at Rs 4 per hour; actual hours worked were 10,500. What is the total variable overhead cost variance, and what do its components show?

The total variance is Rs 3,500 Adverse. Standard cost of 5,000 units is Rs 40,000 against actual Rs 43,500. Expenditure variance is Rs 1,500 Adverse (Rs 42,000 versus Rs 43,500) and efficiency variance is Rs 2,000 Adverse (500 extra hours at Rs 4), together making Rs 3,500.

  1. ARs 3,500 Adverse, being expenditure Rs 1,500 Adverse and efficiency Rs 2,000 AdverseCorrect
  2. BRs 3,500 Adverse, being expenditure Rs 1,500 Favourable and efficiency Rs 2,000 Adverse
  3. CRs 3,500 Adverse, being expenditure Rs 2,000 Adverse and efficiency Rs 1,500 Adverse
  4. DRs 1,500 Adverse, being expenditure Rs 1,500 Adverse and efficiency nil

Explanation

Standard cost for actual output = 5,000 x 8 = 40,000; total variance = 40,000 - 43,500 = 3,500 Adverse. Expenditure = 4 x 10,500 = 42,000 less 43,500 = 1,500 Adverse. Efficiency = 4 x (10,000 - 10,500) = 2,000 Adverse. Sum = 3,500.

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