The Iris Company provides the following information relating to its variable overheads
for October. Overheads are absorbed on the basis of labour hours:

Question

Accepted Answer

The variable overhead efficiency variance is £20,000 (favourable).

Workings
The variable overhead absorption rate on the basis of standard labour hours is
£10 per hour (£800,000/80,000). On the basis of the standard hours needed to
produce one unit, a production of 4,000 units should have taken 20,000 labour
hours (4,000 × 5 = 20,000). In fact the actual production took 18,000 hours. As
there is a difference between the number of hours planned for production and
the number of hours actually taken, a variance has resulted caused in this case by
greater efficiency (fewer hours actually needed than planned).

	£
Actual hours× standard absorption rate (18,000 × £10)	180,000
Standard hours × standard absorption rate (20,000 × £10)	200,000
Favourable efficiency variance	20,000

Standard total variable overhead for October	£800,000
Standard labour hours for October	80,000
Standard hours to produce 1 unit	5
Actual units produced in the first week of October	4,000
Actual labour hours in the first week of October	18,000

Question 11.st.1: The Iris Company provides the following information relating...

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