Question

Omran Company has the following standard cost sheet using an expected capacity of 120,000 units:

Direct materials	25 Kgs @ $1.20	$30.00
Direct labour	2 hours @ $12.50	$25.00
Variable overhead	3 machine hours @  $8.00	$24.00
Fixed overhead	3 machine hours @  $12.00	$36.00
Total		$115.00

During the year, 125,000 units were produced. Actual costs included the following:

Direct materials 3,200,000 Kgs purchased for $3,725,000.         3,110,000 Kgs were used in production.

Direct labour 260,000 hours worked; payroll totaled $3,320,000.

Variable overhead costs: $3,025,000

Fixed overhead costs: $4,275,000

Machine hours used    378,000 hours

Required:

1. Calculate the following variances for the company and explain the (potential) reason(s) for any variance (favorable or unfavorable): 8 marks (1.5 marks for each variance calculation and 0.5 mark for explanation for each variance)

a. Direct materials price variance   

b. Direct labour efficiency variance  

c. Variable overhead spending variance

d. Fixed overhead volume variance          

Answer 1

a)	Direct materials price variance
	(Standard price-Actual price)*Actual quantity used
	=	(1.2-1.16)*3110000
	=	124400F
	Actual Price per kg=	3725000/3200000
		1.16
b)	Direct labour efficiency variance
	(Actual Hours-Standard Hours)*Standard rate
	=	(260000-240000)*12.50
	=	250000U
c)	Variable overhead spending variance
	(Actual overhead rate - standard overhead rate)*Actual hours worked
	=	(8.002646-8)*378000
	=	1000U
	Actual overhead rate=	Variable overhead cost/Machine hours
	=	3025000/378000
	=	8.002646
d)	Fixed overhead volume variance
	(Actual Activity – Normal Activity) × Fixed Overhead Application Rate
	=	(3*120000-378000)*11.31
	=	-203580 F
	Fixed Overhead Application rate=Fixed overhead costs/Machine hours
	=	4275000/378000
	=	4275000/378000
		11.31