In: Accounting
Miller, Inc. manufactures construction equipment and farm machinery tires. For the month of June, year 1, Miller expects to produce 2,500 tires and sell the same number at $1,000 per tire. Budgeted selling and administrative costs for the tires (all fixed) are expected to equal to $50,000. The standard costs per tire are as follows:
Direct materials |
100 pounds @ $2/pound |
$200 |
Direct labor |
20 DLH @ $9/DLH |
180 |
Variable overhead |
4.5 MH @$10/MH |
45 |
Fixed overhead |
4.5 MH @$50/MH |
225 |
Standard cost per unit |
$650 |
Actual results for June differed from the budgeted results. Miller produced 2,300 tires, but sold only 2,000 at a price of $1,050 per tire. Actual fixed selling and administrative costs were $60,000. Actual production costs also differed from the standard:
Direct materials purchased |
240,000 pounds @ $1.80/pound |
$432,000 |
Direct materials used |
240,000 pounds |
|
Direct labor |
44,000 DLH @ $9.20/DLH |
404,800 |
Variable overhead |
10,800 MH @$10.20/MH |
110,160 |
Fixed overhead |
500,000 |
Compute the production cost variances, showing your work below.
DM price variance |
DM quantity variance |
||
DL rate variance |
DL efficiency variance |
||
VOH spending variance |
VOH efficiency variance |
||
FOH budget variance |
FOH production volume variance |
DM Price variance = (Actual price - Standard price) * actual quantity
= ($1.80 - $2) * 240000
= $48000 (F)
DM quantity variance = (Standard quantity - Actual quantity) * Standard price
= ((2300*100) - 240000)* $1.80
= (230000 - 240000) * $1.80
= $18000 (F)
DL rate variance = (Actual rate - Standard rate) * actual hours
= ($9.20 - $9) * 44000
= $8800 (U)
DL efficiency variance = (Standard hours - Actual hours) * Standard rate
= ((20*2300) - 44000) * $9
= $18000 (F)
VOH spending variance = (Actual rate - Standard rate) * actual hours
= ($10.20 - $10) * 10800
$2160 (U)
VOH efficiency variance = (Standard hours - Actual hours) * Standard rate
= ((4.5*2300) - 10800) * $10
= (10350 - 10800) * $10
= $4500 (U)
FOH budget variance = Actual Fixed Overhead - Budgeted Fixed Overhead
= ($500000 + $60000) - ((10800*$50) + $50000)
= $560000 - $590000
= $30000 (U)
FOH production volume variance = (Actual Activity – Normal Activity) × Fixed Overhead Application Rate
= (10800 - (4.5*2300)) * $50
= (10800 - 10350) * $50
= $22500 (F)