Question

Marvel Parts, Inc., manufactures auto accessories. One of the company’s products is a set of seat covers that can be adjusted to fit nearly any small car. The company has a standard cost system in use for all of its products. According to the standards that have been set for the seat covers, the factory should work 1,005 hours each month to produce 2,010 sets of covers. The standard costs associated with this level of production are:

	Total		Per Set of Covers
Direct materials	$	28,542	$	14.20
Direct labor	$	8,040		4.00
Variable manufacturing overhead (based on direct labor-hours)	$	3,618		1.80
			$	20.00

During August, the factory worked only 1,200 direct labor-hours and produced 2,600 sets of covers. The following actual costs were recorded during the month:

	Total		Per Set of Covers
Direct materials (6,000 yards)	$	35,100	$	13.50
Direct labor	$	10,920		4.20
Variable manufacturing overhead	$	5,460		2.10
			$	19.80

At standard, each set of covers should require 2.0 yards of material. All of the materials purchased during the month were used in production.

Required:

1. Compute the materials price and quantity variances for August.

2. Compute the labor rate and efficiency variances for August.

3. Compute the variable overhead rate and efficiency variances for August.

(Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Answer 1

1. Compute the materials price and quantity variances for August:-

Material Price Variance = (SR – AR) * AQ

SR = ($28542/[2010*2]) = $7.1

AR = $35100/6000 = $5.85

AQ = 6000 yards

($7.1 - $5.85) * 6000 = $7500 F

Material Quantity Variance = (SQ – AQ) * SR

SQ = Actual output * SQ for 1 output

    = 2600 covers * 2 = 5200 yards

(5200 – 6000) * $7.1 = $5680 U

2. Compute the labor rate and efficiency variances for August:-

Labour Rate Variance = (SR – AR) * A Hrs

SR = $8040/1005 hrs = $8

AR = $10920/1200 hrs = $9.1

A Hrs = 1200

($8 - $9.1) * 1200 = 1320 U

Labour Efficiency Variance = (S Hrs – A Hrs) * SR

S Hrs = Actual output * S Hrs for 1 output

    = 2600 * (1005/2010) = 1300

(1300 – 1200) * $8 = $800 F

3. Compute the variable overhead rate and efficiency variances for August:-

Variable Overhead Rate Variance= (SR – AR) * A Hrs

SR = $3618/1005 hrs = $3.6

AR = $5460/1200 hrs = $4.55

($3.6 - $4.55) * 1200 = $1140 U

Variable Efficiency Variance = (S Hrs – A Hrs) * SR

(1300 – 1200) * $3.6 = $360 F