If actual overhead exceeds overhead absorbed, the overhead variance is typically considered:

If actual overhead exceeds overhead absorbed, the overhead variance is typically considered:

• A. Unfavorable
• B. Favorable
• C. Neutral
• D. Indeterminate

Answer: (A)

In standard costing, overhead variance compares actual overhead incurred to overhead absorbed (applied) to products. When actual overhead is higher than what was absorbed, more cost was incurred than was allocated, creating an under-absorption (under-applied) overhead variance. This is considered unfavorable because it shows costs were higher than planned and profitability is affected unless managed. For example, actual overhead of 120,000 versus absorbed overhead of 110,000 yields a 10,000 unfavorable variance. If the reverse occurred (actual less than absorbed), the variance would be favorable.

In standard costing, overhead variance compares actual overhead incurred to overhead absorbed (applied) to products. When actual overhead is higher than what was absorbed, more cost was incurred than was allocated, creating an under-absorption (under-applied) overhead variance. This is considered unfavorable because it shows costs were higher than planned and profitability is affected unless managed. For example, actual overhead of 120,000 versus absorbed overhead of 110,000 yields a 10,000 unfavorable variance. If the reverse occurred (actual less than absorbed), the variance would be favorable.