Question

Preble Company manufactures one product. Its variable manufacturing overhead is applied to production based on direct labor-hours and its standard cost card per unit is as follows:

Direct material: 6 pounds at $8.00 per pound	$	48.00
Direct labor: 4 hours at $13 per hour		52.00
Variable overhead: 4 hours at $5 per hour		20.00
Total standard variable cost per unit	$	120.00

The company also established the following cost formulas for its selling expenses:

	Fixed Cost per Month				Variable Cost per Unit Sold
Advertising	$	380,000
Sales salaries and commissions	$	460,000			$	30.00
Shipping expenses					$	21.00

The planning budget for March was based on producing and selling 20,000 units. However, during March the company actually produced and sold 25,500 units and incurred the following costs:

1. Purchased 170,000 pounds of raw materials at a cost of $7.20 per pound. All of this material was used in production.

2. Direct-laborers worked 73,000 hours at a rate of $14.00 per hour.

3. Total variable manufacturing overhead for the month was $427,050.

4. Total advertising, sales salaries and commissions, and shipping expenses were $386,000, $545,000, and $295,000, respectively.

Required:

1. What raw materials cost would be included in the company’s flexible budget for March?

2. What is the materials quantity variance for March? (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance.). Input the amount as a positive value.)

3. What is the materials price variance for March? (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance.). Input the amount as a positive value.)

4. If Preble had purchased 188,000 pounds of materials at $7.20 per pound and used 170,000 pounds in production, what would be the materials quantity variance for March? (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance.). Input the amount as a positive value.)

Answer 1

1. Flexible Budgets Cost Are cost which are associated with the Level of Output, as it considers only Variable Costs.
Here, Raw Material Costs at Actual Level of Output will be considered for Flexible Budget.
= 25500 Units * 6 Pound Per Unit * Rs 8 Per Pound i.e. 1,224,000
2. Material Quantity Variance= ?
As we know,
Material Quantity Variance = (Actual Consumption of RM - Standard Consumption of RM) * Standard Cost Per Unit
= (170,000 - 153,000) * 8      i.e. 136,000 (U)
3. Materials Price Variance=?
As we know,
Material Price Variance = (Actual Cost of RM - Budgeted Cost of RM) * Actual Quantity Purchased
= (7.20 - 8.00) * 170,000      i.e. 136,000 (F)
4. Material Quantity Variance= ?, if Purchased 188,000 pounds of materials at $7.20 per pound and used 170,000 pounds in production
As we know,
Material Quantity Variance = (Actual Consumption of RM - Standard Consumption of RM) * Standard Cost Per Unit
= (170,000 - 153,000) * 8      i.e. 136,000 (U)
No, effect on Material Quantity Variance, as it considers Consumed Quantity irrespective of Purchased Material Quantity.
Budgeted Level of Output : 20000 Units (Per Unit Cost Shown)
Particulars	Quantity	Rate	Amount (In $)
Direct Material (In Pounds)	6.00	8.00	48.00
Direct Labour (In Hours)	4.00	13.00	52.00
Variable Overhead	4.00	5.00	20.00
Standard Cost Per Unit			120.00
Standard Level of Output : 25500 Units
Particulars	Quantity	Rate	Amount
Direct Material (In Pounds)	1,53,000.00	8.00	12,24,000.00
Direct Labour (In Hours)	1,02,000.00	13.00	13,26,000.00
Variable Overhead	1,02,000.00	5.00	5,10,000.00
Actual Level of Output : 25500 Units
Particulars	Quantity	Rate	Amount
Direct Material (In Pounds)	1,70,000.00	7.20	12,24,000.00
Direct Labour (In Hours)	73,000.00	14.00	10,22,000.00
Variable Overhead	73,000.00	5.85	4,27,050.00
Particulars			In Units
Budgeted Production & Sales			20,000
Actual Production & Sales			25,500
Other Selling Expenses
Particulars	Fixed Cost per Month	Variable Cost per Unit Sold	Actual Cost per Month
Advertising	3,80,000		3,86,000
Sales Salaries and Commissions	4,60,000		5,45,000
Shipping Expenses		21	2,95,000