A production manager was recently given a performance report that showed a sizable unfavorable variable-overhead efficiency variance. The manager was puzzled as to how the department could be inefficient in the use/incurrence of this cost.Required: Briefly explain the nature of this variance to the manager. Does the variance really have much to do with variable overhead efficiencies or inefficiencies? Discuss.
What will be an ideal response?
The variable-overhead efficiency variance can be somewhat misleading. It is computed as follows: (actual quantity × standard price) - (standard quantity × standard price). The quantities consist of the actual and standard amounts of the application base that is used to apply overhead to production (such as labor hours or machine hours). The variance really has nothing to do with the manager's efficiency or inefficiency in variable overhead consumption; rather, it deals with the efficiency or inefficiency of the application base.
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