Question

Jones Company has implemented a standard cost system for the company. The company has budgeted $63,000 for fixed mfg. overhead costs and plans on producing 4,500 units in the next year.   Some of the standard costs are given below:                                                                                               

                                                                                                           Standard

                                                                                                            Cost per

                                                                                                                Unit

                               Direct material, 4 lbs./unit X $2.60/lb. =       $10.40

                                Direct labor, 2 hours/unit X $9/hour     =         18.00

                                Fixed Mfg. overhead = 14.00

During the year, the company produced 4,800 units and incurred the following costs:

                                                Materials purchased and used in production 20,000 lbs. at $2.50/lb          $ 50,000

                                                Direct labor cost incurred, 10,000 hours at $8.60/hour                                 $ 86,000

                                                Fixed Mfg. Overhead cost incurred                                                                    $ 64,800

a) Prepare a comparison between budget & actual results in the following form:

                                                                                                   Flexible                     Actual

                                                                         Budgeted         Budget                     Results

Production Costs:                                         Cost/Unit       (           u)                   (            u)         Variances

            Direct Material

            Direct labor

            Fixed Mfg. Overhead

b) Part a) is done to judge the performance of the plant manager controlling production costs. How did he

      do?

c) Analyze material, labor & overhead variances for price & quantity factors to get a more complete story

     about what is going on in the plant.

d) Discuss the results that you got in part c) and are there any concerns?

Answer 1

Answer 1 and 2

Variances = Actual Results - Flexible Budget			Minus sign indicate Favorable variance.
Production Costs:	Budgeted Cost/Unit	Flexible Budget	Actual Results	Variances	Indicate
Direct Material (4800*10.40)	$       10.40	$            49,920	$        50,000	$            80	Unfavorable
Direct labor (4800*18)	$       18.00	$            86,400	$        86,000	$        (400)	Favorable
Fixed Mfg. Overhead		$            63,000	$        64,800	$      1,800	Unfavorable
Total		$          199,320	$     200,800	$      1,480	Unfavorable
Plant manager did not control the Total production costs. (Hint: Direct labor and Fixed mfg. Overhead cost is unfavorable.)

Answer 3 and 4

Summary of Answer
Material
Material price variance	2,000	Favorable
Material quantity variance	2,080	Unfavorable
Labor
Labor price (rate) variance	4,000	Favorable
Labor quantity (efficiency) variance	3,600	Unfavorable
Fixed overhead
Fixed Overhead Budget Variance	1,800	Unfavorable
Plant manager did not control the Total production costs. Reason behind this is Material quantity and labor hour did not use effectively to control the production cost.

	Minus sign indicate Favorable variance.
	Measure	Pound
	Standard price per Pound	$            2.60
	Actual price per Pound	$            2.50
4800*4	Standard quantity in Pounds	19200
	Actual quantity purchased in Pounds	20000
	Actual quantity used in Pounds	20000
	Actual price per Pound	2.50
Less	Standard price per Pound	-2.60
	Difference	-0.10
Multiply	Actual quantity purchased in Pounds	20000
	Material price variance	$        (2,000)
	Indicate	Favorable
	Actual quantity used in Pounds	20000
Less	Standard quantity in Pounds	-19200
	Difference	800
Multiply	Standard price per Pound	2.60
	Material quantity variance	$          2,080
	Indicate	Unfavorable

	Minus sign indicate Favorable variance.
	Measure	Hour
	Standard rate per Hour	$              9.00
	Actual rate per Hour	$              8.60
4800*2	Standard labor Hours	9600
	Actual labor Hours	10000
	Actual rate per Hour	8.60
Less	Standard rate per Hour	-9.00
	Difference	-0.40
Multiply	Actual labor Hours	10000
	Labor price (rate) variance	$          (4,000)
	Indicate	Favorable
	Actual labor Hours	10000
Less	Standard labor Hours	-9600
	Difference	400
Multiply	Standard rate per Hour	9.00
	Labor quantity (efficiency) variance	$            3,600
	Indicate	Unfavorable

Actual Fixed Overheads	64800
Less: Budgeted Fixed Overheads	-63000
Fixed Overhead Budget Variance	$                  1,800
Indicate	Unfavorable