Question

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Preble Company manufactures one product. Its variable manufacturing overhead is applied to production based on direct labor-hours and its standard cost card per unit is as follows:

Direct materials: 4 pounds at $8 per pound	$	32
Direct labor: 2 hours at $16 per hour		32
Variable overhead: 2 hours at $6 per hour		12
Total standard cost per unit	$	76

The planning budget for March was based on producing and selling 32,000 units. However, during March the company actually produced and sold 37,000 units and incurred the following costs:

1. Purchased 160,000 pounds of raw materials at a cost of $7.40 per pound. All of this material was used in production.

2. Direct laborers worked 67,000 hours at a rate of $17 per hour.

3. Total variable manufacturing overhead for the month was $422,100.

1. What raw materials cost would be included in the company’s planning budget for March?

2. What raw materials cost would be included in the company’s flexible budget for March?

3. What is the materials price variance for March? (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.)

4. What is the materials quantity variance for March? (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) Direct Material costs per unit is equal to 4 pounds @ $8 per pound = $32

Total number of units planned for buying and selling in the March month = 32000 units

Therefore raw materials costs would be included in the company's planning budget for March would be equal to 32*32000 = $1024000

2) However the actual number of units produced and sold during the march month are 37000 units therefore the raw materials costs in the company's flexible budget for March will be equal to $32* 37000 i.e. $1184000

3) Material price variance can be calculated as per following method

Material price variance will be equal to ( Actual price- Standard Price) * Actual quantity used

Therefore (4*7.40- 4*8) * 37000 i.e. (29.6-32)* 37000 = -2.4*37000 = 88800 Unfavorable

4) Material quantity variance can be calculated by the ( Actual quantity sold- Standard quantity units planned)* Standard cost price

Therefore Material quantity variance is equal to (37000- 32000)* 8 i.e. 5000*76 = 380000 Favorable for the March month