Question

Earth Company manufactures a single product, Thingy. The standard cost specification sheet shows the following standards for one unit of Thingy.

3 kg of material Y @ $10 per kg	$30
2 hours of direct labour @ $18 per hour	$36
Fixed Overhead - $7 per direct labour hour	$14
Variable Overhead - $4 per direct labour hour	$ 8

The fixed overhead allocation rate is based on normal monthly capacity of 20 000 direct labour hours. Fixed overhead and production are expected to be spread evenly throughout the year.

A total of 6000 Thingy were produced during June. Actual costs incurred during June were:

20,000 kg of material Y were purchased @ $13.50 per kg 22,000 kg of material Y were used.

18,000 direct labour hours were worked at an average wage rate of $15 per hour Actual overhead incurred:

                          Fixed                          $85 000

                          Variable                      $35 000

Required:

1. Compute the following variances:   (6 marks)

1. Direct material price variance

2. Direct material quantity variance

3. Direct labour rate variance

4. Direct labour efficiency variance

5. Variable overhead spending variance

6. Fixed overhead budget variance

2. Discuss three factors that could cause an unfavourable direct material quantity variance.

Answer 1

1]	Direct material price variance = Actual quantity purchased*(Actual rate-Standard rate) = 20000*(13.50-10.00) =	$          70,000	Unfavorable
	Direct material quantity variance = Standard price*(Actual quantity used-Standard quantity) = 10*(22000-6000*3) =	$          40,000	Unfavorable
	Direct labor rate variance = Actual hours*(Actual rate-Standard rate) = 18000*(15-18) =	$          54,000	Favorable
	Direct labor efficiency variance = Standard rate*(Actual hours-Standard hours) = 18*(18000-6000*2) =	$        108,000	Unfavorable
	VOH spending variance = Actual variable overhead-Actual hours*Standard VOH rate) = 35000-18000*4 =	$          37,000	Favorable
	Fixed overhead budget variance = Actual fixed overhead-Budgeted fixed overhead variance = 85000-20000*7 =	$          55,000	Favorable
2]	The three factors could be:
	*Poor quality of material
	*Poor workmanship
	*Wrong setting of standards