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Considering the answer to Variable Overhead variances , it mentions, “Taking the variable overheads as a whole, the variance gets worse as production levels fall, perhaps indicating that the variable overheads are not entirely variable but may include a fixed element.”
Here the question clearly states that Variable overheads will be charged based on the labour hours worked. Since the labour efficiency variance has adversely increased in November and December, it is natural for the variable overhead efficiency variance to adversely increase.
The above quoted line from the answer is not incorrect but how is it relevant to this answer. Please help me here.
Variable overhead efficiency variance should not depend on the volume produced. The variance is calculates as:
(Actual hours worked – Standard hours for actual output) x VOH rate per hour.
So, if the standard time for production is the same as the actual time (whether 10, 1000, or 10,000 units are made, this variance is zero.
The VO efficiency variance moves precisely with the Labour efficiency variance, and implying that both are the result of a difference between actual hours worked and standard hours for the actual output. Therefore I can see no justification for what the answer speculates on ie that variable overheads might not all be variable. I think the comment is incorrect.
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