Question

Access Part V of the IG009 Assessment Scenarios document. You are the senior controller for Healing Touch, a manufacturer of high-quality products designed to help support healthy spines. Its newest product offering is a massage chair and you plan to perform a variance analysis of the chairs manufactured this month to determine if the standards are being met. Once you have completed the analysis, you plan to show it to the production department manager and ask for an explanation of any variances that you believe should be examined. Assuming that Healing Touch manufactured 500 massage chairs this month, use the data contained in Part V of the Assessment Scenarios document to calculate all materials and labor variances in Excel (or other spreadsheet software). Be sure to include price, quantity, wage rate, and labor efficiency variances.

Part V: Computing Variances Using Standard and Actual Costs

Healing Touch Standard and Actual Costs
Standard Cost Sheet: Massage Chair
Metal tubing	6 meters @ $3	$18.00
Leather	2 square meters @ $7	14.00
Padding	3 kilograms @$4	12.00
Direct labor	4 hours @ $15	60.00
Total standard cost		$104.00
Actual Costs Incurred for the Month: Massage Chair
Metal tubing	3,100 meters	$9,455
Leather	1,100 square meters	7,722
Padding	1,600 kilograms	6,560
Direct Labor	1,800 hours	27,270
Total cost		$51,007

Answer 1

In the given question standard data for 1 chair is given however in the month 500 chairs is being manufactured, so revised standard for analaysis purpose for 500 chairs will be as follows:

For Material :

standard Material quantity rate and cost for 500 chairs
	Quantity (A)	Rate : (B )	Cost ( A * B)
Metal Tubing	3000	3.00	$9000
Leather	1000	7.00	$7000
Padding	1500	4.00	$6000

The above quantity per chair is multiplied by 500 so as to get the standard quantity.

Accordingly the Actual Data for 500 chairs is given we will tabulate in order for per unit cost and better explanation:

Actual Material quantity rate and cost for 500 chairs
	Quantity (A)	Rate : (B / A)	Cost (B)
Metal Tubing	3100	3.05	$9455
Leather	1100	7.02	$7722
Padding	1600	4.10	$6560

1.

Now the material Quantity Variance = ( Standard Qty - Actual Qty ) * Standard Price.

A) For Metal tube: Quantity Variance = ( 3000 - 3100 ) * 3 = 300 Adverse / Unfavourable

B) For Leather : Quantity Variance = ( 1000 - 1100 ) * 7 = 700 Adverse / Unfavourable

C) For Padding : Quantity Variance = ( 1500 - 1600 ) *4 = 400 Adverse/ Unfavourable

2

Now the  Material Price variance = ( Standard price - Actual Price ) * Actual Quantity

A) For Metal tube: Price Variance = ( 3 - 3.05 ) * 3100 = $ 155 Adverse / Unfavourable

B) For Leather : Price Variance = ( 7 - 7.02 ) * 1100 = $ 22  Adverse / Unfavourable

C) For Padding : Price Variance = ( 4 - 4.1 ) * 1600 = $ 160  Adverse/ Unfavourable

For Labor :

Standard labor haours per chair = 4 hours , standard rate per hour = 15.

for 500 chairs, standard labor hours = 4 * 500 = 2000 hours ,

Actual labor hoours given = 1800 hours and cost of labour is given = $ 27270 ,

thus actual labor rate = Cost / Hours = 27270 / 1800 = $ 15.15 per hour.

Based on the this information:

- Labor rate Variance = (Standard rate- Actual rate) *Actual hours.

Labor rate variance = ( 15 - 15.15 ) * 1800 = $ 270  Adverse/ Unfavourable.

- Labor Efficiency variance = ( standard. hours - Actual hours )* standard rate

Labor Efficiency variance = ( 2000 - 1800 ) * 15 = $ 3000 Favourble

Now for the labor part the overall labor cost variance = Efficiency variance + Rate variance

Overall labor cost variance = 3000 - 270 =$ 2730 Favourable.

Since it is favourable for the overall cost this will not be a big concern for the management to look into it but still management will try to look better options of reducing the labor hours rate so as to get the favourable variance:

However in case of material we are having price and quantity variance as unfavourable which is a big concern for the management it needs to increase the efficiency and reduce wastages in order to get a favourable quantity and rate variance.