Question

Problem 10A-10 Comprehensive Standard Cost Variances [LO10-1, LO10-2, LO10-3, LO10-4] "Wonderful! Not only did our salespeople do a good job in meeting the sales budget this year, but our production people did a good job in controlling costs as well,” said Kim Clark, president of Martell Company. “Our $20,825 overall manufacturing cost variance is only .5% of the $4,165,000 standard cost of products made during the year. That's well within the 3% parameter set by management for acceptable variances. It looks like everyone will be in line for a bonus this year." The company produces and sells a single product. The standard cost card for the product follows: Inputs (1) Standard Quantity or Hours (2) Standard Price or Rate Standard Cost (1) × (2) Direct materials 3.50 feet $ 4.30 per foot $ 15.05 Direct labor 2.2 hours $ 9 per hour 19.80 Variable overhead 2.2 hours $ 2.20 per hour 4.84 Fixed overhead 2.2 hours $ 4.50 per hour 9.90 Total standard cost per unit $ 49.59 The following additional information is available for the year just completed: The company manufactured 20,000 units of product during the year. A total of 69,000 feet of material was purchased during the year at a cost of $4.50 per foot. All of this material was used to manufacture the 20,000 units produced. There were no beginning or ending inventories for the year. The company worked 45,500 direct labor-hours during the year at a direct labor cost of $8.85 per hour. Overhead is applied to products on the basis of standard direct labor-hours. Data relating to manufacturing overhead costs follow: Denominator activity level (direct labor-hours) 40,000 Budgeted fixed overhead costs $ 180,000 Actual variable overhead costs incurred $ 113,750 Actual fixed overhead costs incurred $ 177,100 Required: 1. Compute the materials price and quantity variances for the year. 2. Compute the labor rate and efficiency variances for the year. 3. For manufacturing overhead compute: a. The variable overhead rate and efficiency variances for the year. b. The fixed overhead budget and volume variances for the year. (For all requirements, 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.

Material price variance = Actual quantity*standard price - Actual quantity*actual price

Material price variance = 69,000*$4.3 - 69,000*$4.5

Material price variance = $296,700 - 310,500 = $13,800 Unfavorable

Material efficiency variance = Standard quantity*standard price - Actual quantity*standard price

Standard quantity = 20,000*3.5 = 70,000

Material efficiency variance = 70,000*$4.3 - 69,000*$4.3

Material efficiency variance = $301,000 - 296,700 = $4,300 Favorable

2.

Labor rate variance = Actual hours*standard rate - Actual hours*actual rate

Labor rate variance = 45,500*$9 - 45,500*$8.85

Labor rate variance = $409,500 - 402,675 = $6,825 Favorable

Labor efficiency variance = Standard hours*standard rate - Actual hours*standard rate

Standard hours = 20,000*2.2 = 44,000 hours

Labor efficiency variance = 44,000*$9 - 45,500*$9

Labor efficiency variance = $396,000 - 409,500 = $13,500 Unfavorable

3-a

Variable overhead rate variance = Actual hours*standard rate - Actual hours*actual rate

Variable overhead rate variance = 45,500*$2.2 - $113,750

Variable overhead rate variance = $100,100 - 113,750 = $13,650 Unfavorable

Variable overhead efficiency variance = Standard hours*standard rate - Actual hours*standard rate

Standard hours = 20,000*2.2 = 44,000 hours

Variable overhead efficiency variance = 44,000*$2.2 - 45,500*$2.2

Variable overhead efficiency variance = $96,800 - 100,100 = $3,300 Unfavorable

3-b

Predetermined fixed overhead rate = $180,000/40,000 = $4.5 per direct labor hour

Fixed overhead budget variance = Actual fixed overhead - Budgeted fixed overhead

Fixed overhead budget variance = $177,100 - 180,000 = $2,900 Favorable

Fixed overhead volume variance = Budgeted fixed overhead - Applied fixed overhead

Fixed overhead volume variance = $180,000 - 204,750 (45,500*$4.5) = $24,750 Favorable