Houston Corporation considers materials and labor to be completely variable costs. Expected production for the year...

Houston Corporation considers materials and labor to be completely variable costs. Expected production for the year is 50,000 units.

Show the analysis in a table format. Write a one-paragraph interpretation of the information presented in the table.

Assume that in the previous exercise the actual production was 60,000 units, materials cost was $247,000, and labor cost was $510,000. What are the budget variances?

Expert Solution

Solution:

PARTICULARS		UNITS	RATE/UNIT		TOTAL
Direct Material Cost		60,000.00	$4.12		$247,000.00
Direct Labour Cost		60,000.00	$8.50		$510,000.00
Total Actual Production Cost					$757,000.00

Particulars	Formula			Variance		Favourable/Adverse	Working
a) Material Cost Variance	Budgeted cost - Actual Cost			-$9,400.00		Adverse	237,600 - 247,000
b) Labour Cost Variance	Budgeted cost - Actual Cost			$30,000.00		Favourable	540,000-510,000

There can be several reasons for an adverse material usage variance. It can be that inferior quality materials have been purchased by the company at a lower price; or there was more wastage. There could be another possibility that due to the changes to the production process or that increased quality controls have been introduced, leading a rejection to more items. Whatever the reason is, it needs to be investigated after separate material usage variances have been calculated for each type of material used and then allocated to a responsibility centre. A favorable labor rate variance reflects cost efficient employment of direct labor by the company which can be due to decline in the overall wage rates or hiring of more un-skilled or semi-skilled labor.

ekkarill92 answered 2 years ago

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