Detailed Answer
Answer (B) is correct.
The total overhead applied was $1,400,000 ($1,200,000 fixed
plus $200,000 variable). Since actual overhead was $1,600,000,
the total overhead variance was $200,000 unfavorable. The
$200,000 total variance would be explained by three elements:
the fixed overhead volume variance, the variable overhead
efficiency variance, and the total spending variance. At $3 per
hour, fixed overhead was applied on the basis of 400,000 hours,
but since the budget called for 500,000 hours, there was an
unfavorable volume variance of 100,000 hours at $3, or
$300,000. The variable overhead efficiency variance is
calculated by multiplying the excess hours of 30,000 (430,000 –
400,000) times the variable application rate of $.50, or $15,000
unfavorable. Therefore, when you combine the $300,000
unfavorable volume variance and the $15,000 unfavorable
efficiency variance, you get $315,000 unfavorable. Since the
total variance was only $200,000 unfavorable, the spending
variance must be favorable in the amount of $115,000.
Algebraically, this is solved as $300,000 U + 15,000 U – SV =
200,000 U. Thus SV = $115,000 F.