Question

"Wonderful! Not only did our salespeople do a good job in meeting the sales budget this year, but our production people did a good job in controlling costs as well,” said Kim Clark, president of Martell Company. “Our $26,050 overall manufacturing cost variance is only 1.0% of the $2,605,000 standard cost of products made during the year. That's well within the 3% parameter set by management for acceptable variances. It looks like everyone will be in line for a bonus this year."

The company produces and sells a single product. The standard cost card for the product follows:

Inputs	(1) Standard Quantity or Hours	(2) Standard Price or Rate			Standard Cost (1) × (2)
Direct materials	4.50 feet	$	3.60	per foot	$	16.20
Direct labor	2.3 hours	$	13	per hour		29.90
Variable overhead	2.3 hours	$	1.50	per hour		3.45
Fixed overhead	2.3 hours	$	6.50	per hour		14.95
Total standard cost per unit					$	64.50

The following additional information is available for the year just completed:

1. The company manufactured 30,000 units of product during the year.
2. A total of 133,000 feet of material was purchased during the year at a cost of $3.95 per foot. All of this material was used to manufacture the 30,000 units produced. There were no beginning or ending inventories for the year.
3. The company worked 70,000 direct labor-hours during the year at a direct labor cost of $12.70 per hour.
4. Overhead is applied to products on the basis of standard direct labor-hours. Data relating to manufacturing overhead costs follow:

Denominator activity level (direct labor-hours)		65,000
Budgeted fixed overhead costs	$	422,500
Actual variable overhead costs incurred	$	112,000
Actual fixed overhead costs incurred	$	420,300

Required:

1. Compute the materials price and quantity variances for the year.

2. Compute the labor rate and efficiency variances for the year.

3. For manufacturing overhead compute:

a. The variable overhead rate and efficiency variances for the year.

b. The fixed overhead budget and volume variances for the year.

(For all requirements, indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Answer 1

• Working

Actual DATA for		30000	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct Material	133000	$                   3.95	$        525,350.00
Direct labor	70000	$                12.70	$        889,000.00
Variable Overhead	70000	$                   1.60	$        112,000.00

Standard DATA for		30000	units
	Quantity (SQ)	Rate (SR)	Standard Cost
	[A]	[B]	[A x B]
Direct Material	( 4.5 feet x 30000 units)=135000 feet	$                   3.60	$     486,000.00
Direct labor	( 2.3 hours x 30000 units)=69000 hours	$                13.00	$     897,000.00
Variable Overhead	( 2.3 hours x 30000 units)=69000 hours	$                   1.50	$     103,500.00

• Requirement 1

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                               3.60	-	$                       3.95	)	x	133000
	-46550
	Variance		$            46,550.00			Unfavourable-U
Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	135000	-	133000	)	x	$                           3.60
	7200
	Variance		$              7,200.00			Favourable-F

• Requirement 2

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                             13.00	-	$                    12.70	)	x	70000
	21000
	Variance		$            21,000.00			Favourable-F
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	69000	-	70000	)	x	$                        13.00
	-13000
	Variance		$            13,000.00			Unfavourable-U

• Requirement [3A]

Variable Overhead Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                               1.50	-	$                       1.60	)	x	70000
	-7000
	Variance		$              7,000.00			Unfavourable-U
Variable Overhead Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	69000	-	70000	)	x	$                           1.50
	-1500
	Variance		$              1,500.00			Unfavourable-U

• Requirement [3B]

Fixed Overhead Production Budget Variance
(	Budgeted Fixed Overhead	-	Actual Fixed Overhead incurred	)
(	$                  422,500.00	-	$          420,300.00	)
	2200
	Variance		$              2,200.00			Favourable-F

Fixed Overhead Production Volume Variance
(	Standard Fixed Overhead or Fixed Overhead absorbed	-	Budgeted Fixed Overhead	)
(	$                  448,500.00	-	$          422,500.00	)
	26000
	Variance		$            26,000.00			Favourable-F

--Working

	Hrs	Rate	Amount
Budgeted Fixed Overhead	65000	$                   6.50	$        422,500.00
Standard Fixed Overhead or Fixed Overhead absorbed	69000	$                   6.50	$       448,500.00
Actual Fixed Overhead incurred	70000	6.004285714	$        420,300.00