Azalea Limited provides the following information relating to its variable overheads.
Overheads are absorbed on the basis of direct labour hours:

Question

Accepted Answer

The variable overhead expenditure variance for Azalea Limited is £9,616 (favourable).
The variable overhead efficiency variance is £4,616 (adverse).

Workings
The standard direct labour hour rate is:

[latex]\frac{£150,000}{6,500}= £23.077[/latex] per standard direct labour hour

This rate per standard direct labour hour is then applied to the actual number of
direct labour hours worked, and the answer compared to the actual variable overheads
in order to calculate the variance:

	£
Actual variable overhead incurred	145,000
Actual production at standard absorption rate (6,700 × £23.077)	154,616
Favourable expenditure variance	9,616

On the basis of the standard hours needed to produce one unit, a production of 7,000
units should have taken 7,000 direct labour hours. In fact the actual production took
6,700 hours. An adverse efficiency variance has resulted, calculated as follows:

	£
Actual hours * standard absorption rate (6,7000 × £23.077)	154,616
Standard hours * standard absorption rate (6,500 × £23.077)	150,000
Adverse efficiency variance	4,616

We can check that the above variances are correct by comparing them with the
overall overhead variance, calculated by comparing the standard total variable
overheads (£150,000) with the actual total variable overheads (£145,000). This
results in an overall favourable variance of £5,000, which agrees with our calculations
of the expenditure variance of £9,616 (favourable) less the efficiency variance
of £4,616 (adverse)

Question 11.st.3: Azalea Limited provides the following information relating t...

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