Question

The Hayes Chemical company produces a chemical used in dry cleaning. Its accounting system uses standard costs. The standard per .5-gallon can of chemical call for 1.20 gallons of material and 1.50 hours of labor. (1.20 gallons of material are needed to produce a .5-gallon can of product due to evaporation.) The standard cost per gallon of material is $6.00. The standard cost per hour for labor $9.00. Overhead is applied at the rate of $7.75 per can. Expected production is 20,000 cans with fixed overhead per year of $55,000 and variable overhead of $5.00 per unit (a .5-gallon can)

During 2021, 23,000 cans were produced; 35,000 gallons of material were purchased at a cost of $250,000; 30,000 gallons of material were used in production. The cost of direct labor incurred in 2021 was $290,000 based on an average actual wage rate of $8.25 per hour. Actual overhead for 2021 was $220,000.

A. Determine the standard cost per unit

B. calculate material, labor, and overhead variances

C. List a possible cause for each variance

Answer 1

Ans: 1. Standard Cost per Unit= Material Cost Per Unit+ Direct Labor Cost per Unit+ Overhead Cost

=> 1.20*6+1.5*9+7.75

=> 7.20+ 13.50+7.75

=> $28.45

2. Materials Purchase Variance= Actual purchase Cost- { Actual Quantity Purchase* Standard Cost}

=> 250,000-{35,000*6}

=> 250,000-210,000

=> 40,000 Unfavorable

Cause for this is As Actual Cost is less than Standard Cost

Materials Quantity Variance= Standard Price*(Actual Quantity used-Standard Quantity Allowed for Actual Production)

=> $6*(30,000-23,000*1.20)

=> $6*(30,000-27,600)

=> $6*2,400

=> $14,400 Unfavorable

Labor Variance

Labor Rate Variance= Actual Labor Cost- { Actual Hours*Standard rate)

=> 290,000-(290,000/8.25*9)

=> 290,000- 313,364

=> 23,364 Favorable.

Labor Efficiency Variance= Standard rate*(Actual Hours-Standard Hours for Actual Production)

=> 9*(290,000/8.25-23,000*1.50)

=> 9*(35,152-34,500)

=> 9*652

=> 5,868 Unfavorable

Overhead Variance:

Standard Overhead cost= Standard variable cost+Fixed Overhead cost

=> 5*23,000+55,000

=> 115,000+55,000

=> 170,000

Controllable Overhead Variance= Actual overhead- Standard Overhead cost

=> 220,000-170,000

=> 50,000 Unfavorable

Overhead Volume Variance= Budgeted Fixed Overhead- Standard Fixed Overhead cost for Actual output

=> 55,000-{23,000*(7.75-6)}

=> 55,000-{23,000*1.75}

=> 55,000- 40,250

=> 14,750 Unfavorable.