Question

Vernon Mills, Inc. is a large producer of men's and women's clothing. The company uses standard costs for all of its products. The standard costs and actual costs per unit of product for a recent period are given below for one of the company's product lines: Materials Standard cost Actual cost Standard: 4m at $5.40 per m $21.60 Actual: 4.4m at $5.05 per m $22.22 Direct labour Standard: 1.6 hrs at $6.75/hr $10.80 Actual: 1.4 hrs at $7.30/hr $10.22 Variable overhead Standard: 1.6 hrs at $2.70/hr $4.32 Actual: 1.4 hrs at $3.25/hr $4.55 Total cost per unit of product $36.72 $36.99 During this period, the company produced 4,800 units of this product. a. Compute the materials price and quantity variance and give a possible reason for each variance. b. Compute the labour rate and efficiency variances and give a possible reason for each variance. c. Compute the variable overhead spending and efficiency variances and give a possible reason for each variance

Answer 1

Material Price Variance = (Standard Price – Actual Price)*Actual Quantity

= (5.40-5.05)*4.4*4,800

= $7,392 F

Material Quantity Variance = (Standard Quantity – Actual Quantity)*Standard Price

= (4,800*4 – 4,800*4.4)*5.40

= $10,368 U

Cheap quality material was purchased at a lower rate, leading to favourable price variance and unfavourable quantity variance (since more quantity was used)

b.Labor Rate Variance = (Standard Rate – Actual Rate)*Actual Hours

= (6.75-7.30)*1.4*4,800

= $3,696 U

Labor Efficiency Variance = (Standard Hours – Actual Hours)*Standard Rate

= (1.6*4,800 – 1.4*4,800)*6.75

= $6,480 F

High quality labor was used at higher rate leading to unfavourable rate variance and favourable efficiency variance

c.Variable overhead spending variance = (standard rate – actual rate)*actual hours

= (2.70-3.25)*1.4*4,800

= $3,696 U

Variable overhead efficiency variance = (Standard Hours – Actual Hours)*Standard rate

= (1.6*4,800-1.4*4,800)*2.70

= $2,592 F

Same reason as labor variances, since overheads are absorbed on the basis of labor cost