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

Nair Engineering Ltd budgets fixed overheads of ₹4,80,000 for 24,000 hours (₹20 per hour), with 8,000 units at 3 standard hours per unit. Actual output was 7,800 units, actual hours worked 23,000, and actual fixed overheads ₹4,90,000. Which statement about the fixed overhead variances is correct?

Capacity variance is ₹20,000 Adverse and efficiency variance is ₹8,000 Favourable. Actual hours of 23,000 fall short of the budgeted 24,000, costing ₹20,000, while standard hours for actual output are 23,400, so 400 extra hours' worth of output at ₹20 gives ₹8,000 favourable.

  1. ACapacity variance ₹20,000 Adverse; efficiency variance ₹10,000 Favourable
  2. BCapacity variance ₹20,000 Adverse; efficiency variance ₹8,000 FavourableCorrect
  3. CCapacity variance ₹20,000 Favourable; efficiency variance ₹8,000 Adverse
  4. DCapacity variance ₹8,000 Adverse; efficiency variance ₹20,000 Favourable

Explanation

Standard hours for actual output = 7,800 × 3 = 23,400. Capacity variance = (23,000 − 24,000) × 20 = ₹20,000 Adverse. Efficiency variance = (23,400 − 23,000) × 20 = ₹8,000 Favourable. Volume = 23,400 − 24,000 = 600 × 20 = ₹12,000 Adverse, which equals the sum of the two. Option 4 swaps the two variances.

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