The variable overhead spending variance measures the difference between the actual cost incurred and the amount that should have been incurred for the actual level of activity.

1. Calculate the Standard Rate: The budgeted rate per setup is calculated as Budgeted Cost / Budgeted Activity = $10,000 / 2,000 setups = $5 per setup.

2. Calculate the Flexible Budget for Actual Activity: This is the standard rate multiplied by the actual activity level: $5/setup × 2,200 setups = $11,000.

3. Calculate the Spending Variance: The variance is the difference between the Actual Cost and the Flexible Budget amount: $10,500 (Actual) - $11,000 (Flexible Budget) = -$500.

A negative result indicates a favorable variance because the actual cost was less than the standard cost allowed for the actual number of setups performed.

B. There is a $1,000 favorable spending variance

This is an incorrect calculation. The difference between the actual cost ($10,500) and the flexible budget for actual activity ($11,000) is $500, not $1,000.

C. There is a $500 unfavorable efficiency variance

This is the wrong variance type and amount. The spending variance is $500 favorable. The efficiency variance, if calculated, would be a different amount.

D. There is a $1,000 unfavorable efficiency variance

This calculation incorrectly uses the static budget activity (2,000 setups) as the standard allowed for actual output. The efficiency variance requires the standard activity allowed for actual production, which is not provided.

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1. Heisinger, K., & Hoyle, J. B. (2012). Managerial Accounting. Saylor Foundation. In Chapter 10, Section 10.4, the variable overhead spending variance is defined as the difference between the actual variable overhead cost and the flexible budget amount based on the actual level of activity. The formula is equivalent to (Actual Cost) – (Standard Rate × Actual Activity). [See Section 10.4, "Overhead Variances"].

2. Walther, L. M., & Skousen, C. J. (2009). Managerial and Cost Accounting. Bookboon. In Chapter 9, "Variance Analysis," the variable overhead spending variance is detailed. The calculation compares the actual variable overhead with the flexible budget for the actual hours (or activity level), confirming the formula: Actual Cost - (Standard Rate x Actual Quantity of the cost driver). [See Chapter 9, pp. 78-79].

3. OpenStax, Rice University. (2019). Principles of Accounting, Volume 2: Managerial Accounting. Chapter 9, "Standard Costs and Variances." This text explains that the variable overhead rate variance (spending variance) "results from paying more or less than expected for variable overhead items." The calculation shown is consistent with the one used in the explanation. [See Section 9.3, "Compute and Evaluate Variable Overhead Variances"].