Question

QUESTION ONE:

Comprehensive Standard Cost Variances

Clarissa McWhirter, vice-president of Cyprus Company, was pleased to see a small variance on the income statement after the trouble the company had been having in controlling manufacturing costs. She noted that the $12,250 overall manufacturing variance reported last period was well below the 3% limit that had been set for variances. The company produces and sells a single product. The standard cost card for the product follows:

Standard Cost Card -Per Unit

Direct materials, 4 metres at $3.50 per metre                                                    $14

Direct labour, 1.5 direct labour-hours at $12 per direct labour-hour                 18

Variable overhead, 1.5 direct labour-hours at $2 per direct labour-hour           3

Fixed overhead, 1.5 direct-labour hours at $6 per direct labour-hour                9

Standard cost per unit                                                                                              44

                                                                                           

The following additional information is available for the year just completed:

a. The company manufactured 20,000 units of product during the year.

b. A total of 78,000 metres of material was purchased during the year at a cost of $3.75 per metre. All of this material was used to manufacture the 20,000 units. There were no beginning or ending inventories for the year.

c. The company worked 32,500 direct labour-hours during the year at a cost of $11.80 per hour.

d. Overhead cost is applied to products on the basis of standard direct labour-hours. Data relating to manufacturing overhead costs follow:

Denominator activity level (direct labour-hours)                             25,000

Budgeted fixed overhead costs (from the flexible budget)       $150,000

Actual fixed overhead costs                                                           $148,000

Actual variable overhead costs                                                      $68,250

Required:

1. Compute the direct materials price and quantity variances for the year.
2. Compute the direct labour rate and efficiency variances for the year.
3. For manufacturing overhead, compute the following:
   1. The variable overhead spending and efficiency variances for the year.
   2. The fixed overhead budget and volume variances for the year.
4. Total the variances you have computed, and compare the net amount with the $12,250 mentioned by the vice-president Do you think that everyone should be congratulated for a job well done? Explain.

Answer 1

All figures are in $

Material Variance

Standard ( 1 unit)			Actual (20,000 unit)
Quantity	Price	Cost	Quantity	Price	Cost
4 meter	3.50	14	78000	3.75	292500

Material Price Variance

Actual Quantity * Actual Price - Actual Quantity * Standard Price

78000 * 3.75 - 78000 * 3.50

292500 - 273000

19500 (Adverse)

Material Quantity Variance

Actual Quantity * Standard Price - Standard Quantity * Standard Price

78000 * 3.50 - 80000 * 3.50

273000 - 280000

7000 (Favourable)

Note - For 1 unit, 4 meter of standard material is required, so for 20,000 unit (20,000 * 4) i.e. 80,000 would be the standard material

Labour Variance

Standard ( 1 unit)			Actual (20,000 unit)
Hours	Rate	Cost	Hours	Rate	Cost
1.5 hours	12	18	32500 hours	11.80	383500

Labour Rate Variance

Actual Hours * Actual Rate - Actual Hours * Standard Rate

32500 * 11.80 - 32500 * 12

6500 ( Favourable)

Labour Efficiency Variance

Actual Hours * Standard Rate - Standard Hours * Standard Rate

32500 * 12 - 30,000 * 12

30000 (Adverse)

Fixed Overhead

Fixed Overhead Budget Variance

Actual Fixed Overhead - Budgeted Fixed Overhead

148000 - 150000

2000 (Favourable)

Fixed Overhead Volume Variance

Budgeted fixed overhead – Fixed overhead applied

Fixed component of predetermined overhead rate = Budgeted fixed overhead/budgeted hours

150000/25000 = 6 per hour

Fixed overhead applied = Fixed component of predetermined overhead rate × Standard hours allowed for actual output

6 * ( Actual Output * Standard Hour per unit )

6 *(20000 * 1.5 )

180000

So, Fixed Overhead Volume variance =

150000 - 180000

30000 (Adverse)

Variable Overhead

Variable Overhead Spending Variance

(Standard Rate * Actual Hour) - Actual Variable Overhead cost

2 * 32500 - 68250

65000 - 68250

3250 (Adverse)

Variable Overhead Efficiency Variance

Standard Rate * ( Actual Hours - Standard Hours )

2 * (30000 - 32500)

5000 (Favourable)

Material Price Variance	(19500)
Material Quantity Variance	7000
Labour Rate Variance	6500
Labour Efficiency Variance	(30000)
Variable Overhead Spending Variance	(3250)
Variable Overhead efficiency Variance	5000
Fixed overhead budget variance	2000
Fixed overhead volume variance	(30000)

NO, Everyone should not be congratulated as job is not well done

the net manufacturing variance is 28000 adverse, which is way more than the 12250