If actual total overhead is less than the standard overhead applied, the overhead variance is:

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

Answer: (B)

This question tests how overhead variances are classified by comparing actual overhead to what was applied. When the actual overhead spent is less than the overhead that was applied to production, you have over-applied overhead. That means costs were lower than what was allocated, which is favorable because it reduces the amount charged to inventory and cost of goods sold relative to what was planned. The difference (applied minus actual) is a positive amount, leading to a favorable variance.

If actual overhead equaled applied, the variance would be neutral. If actual overhead were higher than applied, the variance would be unfavorable. There isn’t a situation here that would be indeterminable.