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Chilton allocates variable manufacturing overhead costs on the basis of machine hours. Chilton budgeted .5 machine hours per lamp and allocates overhead at a rate of $1.80 per machine hour. Last year Chilton manufactured 23,000 lamps, used 13,800 machine hours and incurred actual overhead costs of $15,180.
If the direct labor is not efficient at producing the good output, there will be an unfavorable labor efficiency variance. That inefficiency will likely cause additional variable manufacturing overheadâresulting in an unfavorable variable manufacturing overhead efficiency variance.