Which statement about overhead variances is true?

Which statement about overhead variances is true?

• A. The overhead volume variance is calculated from the difference between actual output and budgeted output, while the overhead capacity variance compares actual hours to budgeted hours used to absorb overhead.
• B. The overhead capacity variance is calculated from the difference between actual output and budgeted output.
• C. The overhead volume variance relates to labor efficiency, and capacity variance relates to material usage.
• D. The overhead volume variance relates to actual input hours and budgeted hours.

Answer: (D)

Overhead variances hinge on the level of activity used to absorb overheads. If overhead is absorbed using a standard rate per hour, the volume variance measures how the actual level of activity differed from what was planned, expressed through hours. So, the volume variance is driven by the difference between actual input hours and budgeted hours, multiplied by the standard overhead rate per hour. This captures how producing more or fewer hours than planned affects the overhead absorbed into product costs. The capacity and efficiency components split this further: capacity looks at how the actual hours compare to budgeted hours, while efficiency looks at how many hours were needed to produce the actual output relative to standard hours for that output. But the core idea for the volume variance, when using hours as the absorption base, is that it relates actual hours to budgeted hours. The other statements mix the bases (for example, tying volume variance to differences in output rather than hours, or misassigning which variance is about hours versus output), which is why they aren’t correct in the standard hour-based absorption framework.

Overhead variances hinge on the level of activity used to absorb overheads. If overhead is absorbed using a standard rate per hour, the volume variance measures how the actual level of activity differed from what was planned, expressed through hours.

So, the volume variance is driven by the difference between actual input hours and budgeted hours, multiplied by the standard overhead rate per hour. This captures how producing more or fewer hours than planned affects the overhead absorbed into product costs. The capacity and efficiency components split this further: capacity looks at how the actual hours compare to budgeted hours, while efficiency looks at how many hours were needed to produce the actual output relative to standard hours for that output. But the core idea for the volume variance, when using hours as the absorption base, is that it relates actual hours to budgeted hours.

The other statements mix the bases (for example, tying volume variance to differences in output rather than hours, or misassigning which variance is about hours versus output), which is why they aren’t correct in the standard hour-based absorption framework.