Question

	Original Budget	Actual	Flexible Budget
Units Produced (in units)	10,000	12,000
Materials used (kg)	400	700
Material cost ($)	8,000	See purchases
Direct Labour (hours)	35,000	46,102
Direct Labour ($)	385,000	507,080
Variable Overhead ($)	350,000	419,161
Fixed Overhead ($)	160,000	161,000

           

Other Information

Overhead is Allocated on Direct Labour Hours

During the year, 800 kg of materials were purchased for $5,000

Beginning Inventory: none

Ending Inventory:     100kg

Required:

Calculate the flexible budget amounts for all items.

Calculate the following variances

1.Material Rate

2.Material Efficiency

3.Labour Price

4.Labour Efficiency

5.Variable Overhaed Rate

6.Variable Overhead Efficiency

7. Fixed Overhead Rate

8.Fixed Overhead Production Volume

9.Assume that the Material, Labour and Variable Overhead variances are inter-related. What is the most likely single cause of these variances. Briefly explain your answer.

Answer 1

	Original Budget	Actual	Flexible Budget
Units Produced (in units)	10,000	12,000	12,000
Materials used (kg)	400	700	480
Material cost ($)	8,000	4,375	9,600
Direct Labour (hours)	35,000	46,102	42,000
Direct Labour ($)	385,000	507,080	462,000
Variable Overhead ($)	350,000	419,161	420,000
Fixed Overhead ($)	160,000	161,000	192,000

Material per unit= 400/10,000= 0.04 , For 12,000 units 12,000*0.04= 480 kg.

Material cost per unit= 8,000/400= 20, for 480 kg= 480*20= 9,600

Direct Labor hour per unit= 35,000/10,000= 3.4, For 12,000 units 12,000*3.5= 42,000 hours

Direct labor cost per hour= 385,000/ 35,000= 11. For 42,000 hours, 42,000 *11= 462,000

Variable overhead rate per hour= 350,000/35,000= 10

Variable overheads= 42,000 labor hours *$10 per hour 420,000

Fixed overhead 192,000

1-Direct material price variance= (Standard rate - Actual rate)* Actual quantity of material consumed

Actual quantity of material consumed = 700 kgs

Standard rate per kg= $20

Actual rate per kg= 5,000/ 800= $6.25 kg

Material price variance= (20-6.25) *700

=$9,625 favourable

2-Direct material quantity variance = (Standard material for actual output -Actual material used)* standard rate

Standard material for actual output= (Actual output * standard material per unit ) 12,000*0.04= 480 kgs

Actual quantity of material consumed = 700 kgs

Standard rate per kg= $20

Material quantity variance= (480-700)*20

=$4,400 unfavorable

3-Direct Labor rate variance= (Standard rate-Actual rate) * Actual hours paid

Standard rate per labor hour =$385,000/ 35,000= $11

Actual direct labor hours worked= 46,102 labor hours]

Actual rate= 507,080/ 46,102= $11

Labor price variance =(11-11)*0

=0

4-Direct labor efficiency variance= (Standard hours for actual output-Actual hours worked)* Standard rate per labor hour

Standard rate per labor hour= $11

Actual direct labor hours worked= 46,102 labor hours

Standard hours for actual output= 12,000 *3.5= 42,000 hours

Labor efficiency variance= (42,000-46,102)*11

=$45,122 unfavorable

5-Variable overhead rate variance= (Standard rate per hour* Actual hours)- (Actual rate per hour * Actual hour)

Actual direct labor hours worked= 46,102 labor hours

Standard rate per hour= 350,000/35,000= 10

Actual rate per hour= 419,161/ 46,102= $9.09

Variable overhead rate variance= (10-9.09) *46,102

=$41,952.80 favorable

6-Variable overhead efficiency variance = Standard variable overhead rate per hour *(Standard hours for actual output - Actual hours)

Actual direct labor hours worked= 46,102 labor hours

Standard hours for actual output= 12,000*3.5 per hour= 42,000 hours

Standard rate per hour= $10

Variable overhead efficiency variance= (42,000-46,102)* 10

=$41,020 unfavorable

7- Fixed overhead rate variance= Budgeted fixed overheads - Actual fixed overheads

Actual fixed overhead= $161,000

Budgeted fixed overhead= $160,000

Fixed overhead rate variance= 160,000-161,000

=$1,000 unfavorable

8-Fixed overhead production volume= Standard fixed overhead rate per unit *(Actual putput- Budgeted output)

Standard fixed overhead rate per unit= 160,000/ 10,000= $16

Actual output= 12,000 units

Budgeted output= 10,000 units

Fixed overhead production volume=(12,000-10,000) *16

=$32,000 favorable

9-On assuming Material, Labor and Variable overhead are inter related. The mostly likely single cause of these variances can be justified with the example follows. If a company purchases low quality input it will require more labor working on that which will increase the labor costs and also variable overheads so all are impacted with the single decision of a company so it can be said that they are relte