Question

Waterways Continuing Problem 12

At the end of June the manager of the B.C. manufacturing plant was provided with the following variance analysis report:

		Budget		Actual		Variance		Favourable (F)/ Unfavourable (U)
Production in units		334,000		349,000		15,000		F
Production costs:
Direct material		$694,720		$707,184		$(12,464)		U
Direct labour		1,586,500		1,623,380		(36,880)		U
Variable overhead costs		133,600		138,869		(5,269)		U
Fixed overhead costs		200,400		195,845		4,555		F
Total production costs		$2,615,220		$2,665,278		$(50,058)		U

The manager immediately called the production supervisor, demanding an explanation for the large unfavourable variance for the quarter. The production supervisor was puzzled. He thought the cost-cutting measures they had incorporated were beginning to work. He certainly wasn’t expecting such a large discrepancy.

The standard rates the plant was using with its normal costing system are summarized below.

		Volume			Cost
Direct material		1.30	kg per unit		$1.60	per kg
Direct labour		0.25	hour per unit		$19.00	per hour
Predetermined overhead rate:
Variable		0.25	hour per unit		$1.60	per hour
Fixed		0.25	hour per unit		$2.40	per hour

Other relevant information:

1.		A total of 461,000 kg of direct materials were purchased during the quarter at a cost of $1.80 per kilogram.
2.		A total of 441,990 kg of direct materials were used in production to manufacture 349,000 units.
3.		Payroll recorded 86,350 direct labour hours at an average cost of $18.80 per hour.

Calculate the following production variances.

Material price variance		$	Neither favourable nor unfavourable/ Unfavourable/ Favourable
Material quantity variance		$	Unfavourable/ Neither favourable nor unfavourable/ Favourable
Labour price variance		$	Favourable/ Unfavourable/ Neither favourable nor unfavourable
Labour efficiency variance		$	Neither favourable nor unfavourable/ Favourable/ Unfavourable
Variable overhead variance		$	Favourable/ Neither favourable nor unfavourable/ Unfavourable

Answer 1

• Working data

Actual DATA for		349000	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct Material	461000	$                   1.80	$        829,800.00
Direct labor	86350	$                18.80	$     1,623,380.00
Variable Overhead	86350	$                   1.61	$        138,869.00

Standard DATA for		349000	units
	Quantity (SQ)	Rate (SR)	Standard Cost
	[A]	[B]	[A x B]
Direct Material	( 1.3 yards x 349000 units)=453700 yards	$                   1.60	$     725,920.00
Direct labor	( 0.25 hours x 349000 units)=87250 hours	$                19.00	$ 1,657,750.00
Variable Overhead	( 0.25 hours x 349000 units)=87250 hours	$                   1.60	$     139,600.00

• Requirements asked, with calculations

[1]

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                               1.60	-	$                       1.80	)	x	461000
	-92200
	Variance		$            92,200.00			Unfavourable-U

OR

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                               1.60	-	$                       1.80	)	x	441990
	-88398
	Variance		$            88,398.00			Unfavourable-U

[2]

Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	453700	-	441990	)	x	$                           1.60
	18736
	Variance		$            18,736.00			Favourable-F

[3]

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                             19.00	-	$                    18.80	)	x	86350
	17270
	Variance		$            17,270.00			Favourable-F

[4]

Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	87250	-	86350	)	x	$                        19.00
	17100
	Variance		$            17,100.00			Favourable-F

[5] All Variable variances

Variable Overhead Spending Variance
(	Standard Cost	-	Actual Cost	)
(	$                  139,600.00	-	$          138,869.00	)
	731
	Variance		$                  731.00			Favourable-F

Variable Overhead Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                               1.60	-	$                       1.61	)	x	86350
	-709
	Variance		$                  709.00			Unfavourable-U
Variable Overhead Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	87250	-	86350	)	x	$                           1.60
	1440
	Variance		$              1,440.00			Favourable-F