Question

Problem 9A-10 Comprehensive Standard Cost Variances [LO9-4, LO9-5, LO9-6, LO9-7]

"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 $35,150 overall manufacturing cost variance is only 1.6% of the $2,196,875 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	4.00 feet	$	4.00	per foot	$	16.00
Direct labor	1.1 hours	$	13	per hour		14.30
Variable overhead	1.1 hours	$	2.40	per hour		2.64
Fixed overhead	1.1 hours	$	6.50	per hour		7.15
Total standard cost per unit					$	40.09

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

1. The company manufactured 20,000 units of product during the year.
2. A total of 77,000 feet of material was purchased during the year at a cost of $4.25 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.
3. The company worked 24,000 direct labor-hours during the year at a direct labor cost of $12.50 per hour.
4. 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)		19,000
Budgeted fixed overhead costs	$	123,500
Actual variable overhead costs incurred	$	64,800
Actual fixed overhead costs incurred	$	120,900

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.)

1.	Materials price variance		U
	materials quantity variance		F
2.	labor rate variance		F
	labor efficiency variance		U
3a.	variable overhead rate variance		U
	variable overhead efficiency variance		U
3b.	fixed overhead budget variance		F
	fixed overhead volume variance		F

Answer 1

1)         

Actual price of material (AP)= $4.25 per foot

Actual quantity of raw material (AQ)= 77000 feet

Standard price of raw material (SP)= $ 4 per foot

Standard quantity of raw material (SQ)

= Actual production* Standard quantity required per unit

= 20000 * 4 feet = 80000 feet

Materials price variance = (AP-SP) * AQ

= (4.25-4) * 77000= $19250 U

Variance is unfavorable because actual price is greater than the standard price.

Material quantity variance = (AQ- SQ) * SP

= (77000-80000) * 4= $12000 F

Variance is favorable because actual quantity is lower than the standard.

2)

Actual rate of labor (AR)= $12.5 per hour

Actual hours (AH) = 24000 hours

Standard rate (SR)= $13 per hour

Standard hours (SH)= Actual production * Standard hours required per unit

= 20000 * 1.1= 22000 hours

Labor rate variance = (AR-SR) * AH

= (12.5-13) * 24000= $12000 F

Variance is favorable because actual rate is lower than the standard.

Labor efficiency variance= (AH-SH) * SR

= (24000-22000) * 13= $26000 U

Variance is unfavorable because actual hours is higher than the standard.

3a)

Standard rate of variable overhead (SR)= $2.40 per hour

Standard hours (SH) = Actual production * Standard hours

= 20000*1.1= 22000 hours

Actual rate (AR)= Actual cost/ Actual hours= $64800/ 24000= $2.7 per hour

Actual hours (AH)= 24000 hours

Variable overhead rate variance= (AR-SR) * AH

= (2.7-2.4) * 24000= $7200 U

Variance is unfavorable because actual rate is higher than the standard.

Variable overhead efficiency variance= (AH-SH) * SR

= (24000-22000) * 2.4= $4800 U

Variance is unfavorable because actual hours is greater than the standard.

3b)

Budgeted fixed overhead costs= $123500

Actual fixed overhead costs incurred= $120900

Fixed overhead budget variance

= Budgeted fixed overhead – Actual fixed overhead

= $123500 - $120900= 2600 F

Variance is favorable, actual fixed overhead is lower than the budgeted.

Fixed overhead applied= Actual hours* Standard rate= 24000* 6.5= $156000

Fixed overhead volume variance

= Budgeted fixed overhead – Applied fixed overhead

= 123500- 156000= $32500 F

Variance is favorable because applied is exceeding the budgeted.