Case Scenario:
You recently were hired as an accountant for Northern Pacific Manufacturing. One of your responsibilities is to develop and maintain a standard costing system for overhead as well as materials and labor standard for the company.
During a recent planning meeting, the company's production manager expressed concern regarding the formulae for the spending and efficiency variances for variable overhead contained in your written proposal for the standard costing system. The production manager was unclear on what the proper interpretation of these two variances should be.
Required:
Q1. What is the proper interpretation of the variable overhead spending variance? What value does the variable overhead spending variance have to company management?
Q2. What is the proper interpretation of the variable overhead efficiency variance? Who in the company is responsible for control of the efficiency variance?