Discount Sales Company uses standard costing to manage its d

Discount Sales Company uses standard costing to manage its direct and overhead costs. Overhead costs are allocated based on direct labor hours. In the first quarter, Discount Sales had a favorable efficiency variance for its variable overhead costs. Which of the following scenarios would be a reasonable explanation for that variance?

A The actual number of direct labor hours was lower than the budgeted hours.

B The actual variable overhead costs were higher than the budgeted costs.

C The actual variable overhead costs were lower than the budgeted costs.

D The actual number of direct labor hours was higher than the budgeted hours.

Solution

SInce the overhead costs are allocated based on direct labor hours and we know that the efficiency variance is favourable and this would happen when the number of labour hours is lower than the budgeted hours so option A is correct

A The actual number of direct labor hours was lower than the budgeted hours.