Trull Company uses a standard cost system. Variable overhead costs are allocated based on direct labor hours. In the first quarter, Trull had a favorable cost variance for variable overhead costs. Which of the following scenarios is a reasonable explanation for this 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.

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

Explanation:

Variable Overhead Cost variance = Budgeted cost - Actual Cost

where this value is positive, this is favorable, where this is negative it is unfavorable.

Actual cost = Actual hours X Actual rate per hour

Budgeted Cost = Budgeted hours for actual level of production X Budgeted rate per hour

Even if actual hours are lower than budgeted it will not lead to favorable overhead as actual rate per hour might be less.

Total variable overhead will only be favorable when net actual variable overhead cost is less than budgeted variable overhead costs.

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