Question

You have recently graduated from university and have accepted a position with Sea-Jewels Inc., the manufacturer of a popular consumer product. During your first week on the job, the vicepresident has been favourably impressed with your work. She has been so impressed, in fact, that yesterday she called you into her office and asked you to attend the executive committee meeting this morning to lead a discussion on the variances reported for last period. Anxious to favourably impress the executive committee, you took the variances and supporting data home last night on a memory stick to study.      Unfortunately, when you tried to open the files this morning some of them had become corrupted. All you could retrieve is shown below:

Standard Cost Card
Direct materials, 10 kilograms at $2 per kilogram	$ 20.00
Direct labour, 1.5 direct labour-hours at $14 per direct labour-hour	21.00
Variable manufacturing overhead, 1.5 direct labour-hours at $6 per direct labour-hour	9.00
Fixed manufacturing overhead, 1.5 direct labour-hours at $10 per direct labour-hour	15.00
Standard cost per unit	$ 65.00

		Variances Reported
	Total Standard Cost*	Price or Rate	Spending or Budget	Quantity or Efficiency	Volume
Direct materials	$144,000	$7,555 F		$7,100 U
Direct labour	$151,200	$8,625 U		$9,800 U
Variable manufacturing overhead	$64,800		$520 F	$?† U
Fixed manufacturing overhead	$108,000		$280 F		$7,000 U

*Applied to work in process during the period.

†Data corrupted.

You recall that manufacturing overhead cost is applied to production on the basis of direct labour-hours and that all of the materials purchased during the period were used in production. Since the company uses JIT to control work flows, work in process inventories are insignificant and can be ignored.

It is now 8:30 A.M. The executive committee meeting starts in just one hour; you realize that to avoid looking grossly incompetent, you must somehow generate the necessary “backup” data for the variances before the meeting begins. Without backup data, it will be impossible to lead the discussion or answer any questions.

Required:

1- How many units were produced last period ? 2-How many kilograms of direct material were purchased and used in production? 3-What was the actual cost per kilogram of material? (Round your answer to 2 decimal places.) 4-How many actual direct labour-hours were worked during the period? 5-What was the actual rate paid per direct labour-hour? (Round your answer to 2 decimal places.) 6- How much actual variable manufacturing overhead cost was incurred during the period? 7-What is the total fixed manufacturing overhead cost in the company’s flexible budget? 8-What were the denominator direct labour-hours for last period?

Answer 1

1 ) To calculate units produced if standard cost of direct material for the period and standard cost of direct material per unit is given the following formula will be used

Units produced = standard cost of direct material for the period / standard cost per unit

= $144,000 / $20

= 7200 units

The total volume for last period is 7200 units .

2)

To calculate the actual quantity used in production the following formula will be used

Direct material quantity or efficiency variance = (AQ – SQ) x SP

Where

AQ = actual quantity used

SQ = standard quantity used for total volume produced which is

SQ = 7200 units x 10 kg per unit

=7200 x 10

=72,000 kg

SP = standard price per unit of DL is $2

Direct material quantity or efficiency variance = 7100 U means the actual qty is more than standard qty used in production

Putting the values in the formula we get

7100 = (AQ x $2) – (72,000 x $2)

7100 = 2AQ - $144,000

2AQ = $144000 +$7100

2AQ = $151,100

AQ = 151,100 /2

AQ = 75550 kgs

The actual quantity used in production is 75,550 kgs as assuming there is no WIP

3)

The actual cost per direct material per KG can be calculated as under if there is positive variance as under

Actual cost per Direct material per KG = standard price per kg – (direct material price variance / actual quantity used for production)

Where

Standard price per kg = $2

Direct material price variance = $7555        

Actual quantity used for production = 75550 kgs

Putting the value the formula we get

Actual cost per Direct material per KG = $2 – ($7555/75550)

Actual cost per Direct material per KG = $2 – ($0.10)

= $1.90 per KG

The actual cost per KG is $1.90

4)

To calculate the actual direct labour used in production the following formula will be used

Direct labour quantity or efficiency variance = (ADL – SDL) x SP

Where

ADL = actual direct labour

SDL = standard direct labour used for total volume produced which is

SDL = 7200 units x 1.5 DL

=7200 x 1.5

=10,800 DL

SP = standard price per hour of Direct labour is $14

Direct labour quantity or efficiency variance = 9800 U means the actual DL   is more than standard DL used in production

Putting the values in the formula we get

9800 = (ADL x $14) – (10,800 x $14)

9800 = 14AQ - $151,200

14AQ = $151,200+$9,800

14AQ = $161,000

AQ = 161,000 /14

AQ = 11,500 DL

The actual direct labour used in production is 11,500 hours as assuming there is no WIP

5)

The actual cost per direct labour can be calculated as under if there is negative variance as under

Actual cost per Direct labour per hour = standard price per direct labour hour + (direct labour variance / actual DL used for production)

Where

Standard price per direct labour hour = $14

direct labour variance = $8,625                      

Actual Direct labour used for production = 11,500

Putting the value the formula we get

Actual cost per Direct labour per hour = $14 – ($8625/11,500)

Actual cost per Direct labour per hour = $14 + ($0.75)

= $14.75 per 1 direct labour hour

actual rate paid per direct labour-hour is $14.75