Question

JC Penny produces high quality formal dresses. In January 2019 they produced 17,000 dresses. For the month of January, the following standard and actual cost data are available. The normal monthly capacity of the company is 30,000 direct labor hours. All material purchased in January was used in January production.

	Standard per Dress	Actual
Direct materials	5.0 yards @ $8.00 per yard	$660,000 for 80,000 yards
Direct labor	1.5 hours @ $15.00 per hour	$384,000 for 24,000 hours
Overhead	hours @ $5.50 per hour (fixed $3.40; variable $2.10)	$110,000 fixed overhead $52,000 variable overhead

Overhead is applied on the basis of direct labor hours. At normal capacity, budgeted fixed overhead costs are $102,000 per month and budgeted variable overhead costs are $63,000 per month.

Required

1. Which of the variances should be investigated if management considers a variance of more than 5% from standard to be significant?
2. Provide a discussion of the tradeoffs that are most likely to exist between the direct material and direct labor variances.

Answer 1

Direct materials price variance = AQ*(AR-SR) = 80000*((660000/80000)-8) = 20000 Unfavorable

Direct materials efficiency variance = SR*(AH-SH) = 8*(80000-(5*17000)) = -40000 = 40000 Favorable

Direct labor rate variance = AH*(AR-SR) = 24000*((384000/24000)-15) = 24000 Unfavorable

Direct labor efficiency variance= SR*(AH-SH) = 15*(24000-(1.50*17000)) = -22500 = 22500 Favorable

Variable overhead spending variance = AH*(AR-SR) = 24000*((52000/24000)-2.10) = 1600 = 1600 Unfavorable

variable overhead efficiency variance = SR*(AH-SH) = 2.10*((24000-(1.50*17000)) = -3150 = 3150 Favorable

fixed overhead spending variance = actual fixed overhead - budgeted fixed overhead = 110000-102000 = 8000 Unfavorable

fixed overhead production volume variance = budgeted fixed overhead – applied fixed overhead = 102000-(24000*3.40) = 20400 Favorable

Part 1

No.		Variance	% variance
1	Direct materials price variance	20000 U	3.13% U	(20000/(80000*8))
2	Direct materials efficiency variance	40000 F	5.88% F	(40000/(8*5*17000))
3	Direct labor rate variance	24000 U	6.67% U	(24000/(24000*15))
4	Direct labor efficiency variance	22500 F	5.88% F	(22500/(15*1.50*17000))
5	Variable overhead spending variance	1600 U	3.17% U	(1600/(2.10*24000)
6	variable overhead efficiency variance	3150 F	5.88% F	(3150/(2.10*1.50*17000))
7	fixed overhead spending variance	8000 U	7.84% U	(8000/102000)
8	fixed overhead production volume variance	20400 F	20.00% F	(20400/102000)

% variance = variance / flexible budget

As most of all variances are above 5% except direct materials price variance and variable overhead spending variance, the management needs to investigate direct materials efficiency variance, direct labor rate variance, direct labor efficiency variance, variable overhead efficiency variance, fixed overhead spending variance and fixed overhead production volume variance.

Part 2

Total materials variance = $20000 U + $40000 F = $20000 F

Total labor variance = 24000 U + 22500 F = $1500 U

As the materials variance is favorable and labor variance is unfavorable, it is possible to have a trade-off between materials variance and labor variance. The better materials price variance is likely to contribute to unfavorable labor variance.