Question

The management of Green Energy Manufacturing is analyzing variable overhead variances for the fiscal period just ended. The flexible budget called for $176,000 in variable overhead but actual variable overhead was $100,000. In computing the overhead variances, Green’s management discovered that it had used 40,000 pounds of direct material, rather than the budgeted amount of 44,000 pounds. (Pounds of direct material is the single overhead driver of variable overhead). The standard variable overhead rate per pound of direct material is $2.00.

What is Green's variable overhead spending variance?

a.$36,000 (U)

b.$20,000 (F)

c.$80,000 (U)

d.$20,000 (U)

Answer 1

Variable overheads is expenditure dependent on the level of operational activity. So variable overhead spending variance is difference between actual variable overheads and budgeted variable overheads at a given level of activity.

Budgeted variable overheads	$176000
Actual variable overhead	$100000
Budgeted direct material	44,000 pounds
Actual direct material	40,000 pounds

Pounds of Direct Material is a single overhead driver of variable overhead.

The standard overhead variable overhead rate per pound of direct material is $2.00

Green's variable overhead spending variance = Actual variable overheads-(Actual Direct material* Standard Variable Overhead rate per hour)

=$100000--(40,000*$2)

=$100000-$80000

=$20000 Unfavourable