Question

Odette’s Oil Co. (OOC) produces high-quality olive oil and has implemented a standard costing system. Below is part of a standard cost card for one batch of oil:

Direct materials (20 kilograms × $10 per kilogram)	$200
Direct labour (six hours × $15 per hour)	90
Variable overhead	54
Total variable costs of manufacturing	$344

Variable overhead is applied based on direct labour hours.

The production and costing information for the last year has just arrived on OOC’s controller’s desk. The information shows that 20,000 batches of oil were produced. OOC purchased 408,000 kilograms of direct materials at a total cost of $4,386,000. Total direct labour was $1,700,400, and total hours worked were 109,000. Actual variable overhead for the year was $946,120.

Required:

Calculate the following variances:

1. Direct materials price variance
2. Direct labour efficiency variance
3. Variable overhead rate variance

Answer 1

Ans. A	Materials price variance = (Standard price * Actual quantity purchased) - Actual materials purchased cost
		($10 * 408,000) - $4,386,000
		$4,080,000 - $4,386,000
		-$306,000	or   $306,000 unfavorable
Ans. B	Labor efficiency variance = (Standard hours - Actual hours) * Standard rate
		(120,000 - 109,000) * $15
		11,000 * $15
		$165,000	Favorable
	*Standard hours = Actual units produced and sold * standard hours per unit
		20,000 * 6 hours
		120,000 hours
Ans. C	Variable overhead is based on direct labor hours, therefore in the calculation of
	variable overhead variances, the standard and actual direct labor hours will remain same.
	Variable Overhead rate variance = (Standard rate * Actual hours) - Actual variable overhead cost
		($9 * 109,000) - $946,120
		$981,000 - $946,120
		$34,880	Favorable
	*Standard variable overhead rate = Budgeted variable cost per unit / labor hours per unit
		$54 / 6
		$9 per hour