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 $18,300 overall manufacturing cost variance is only 1.2% of the $1,525,000 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	2 feet	$	8.45	per foot	$	16.90
Direct labor	1.4 hours	$	16	per hour		22.40
Variable overhead	1.4 hours	$	2.50	per hour		3.50
Fixed overhead	1.4 hours	$	6	per hour		8.40
Total standard cost per unit					$	51.20

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 64,000 feet of material was purchased during the year at a cost of $8.55 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 43,500 direct labor-hours during the year at a direct labor cost of $15.80 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)		35,000
Budgeted fixed overhead costs	$	210,000
Actual variable overhead costs incurred	$	108,000
Actual fixed overhead costs incurred	$	211,800

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.)

	1. Materials price variance Materials quantity variance 2. Labor rate variance Labor efficiency variance 3a. Variable overhead rate variance Variable overhead efficiency variance 3b. Fixed overhead budget variance Fixed overhead volume variance

Answer 1

• All working forms part of the answer
• Workings

Actual DATA for		30000	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct Material	64000	$                   8.55	$        547,200.00
Direct labor	43500	$                15.80	$        687,300.00
Variable Overhead	43500	$                   2.48	$        108,000.00

Standard DATA for		30000	units
	Quantity (SQ)	Rate (SR)	Standard Cost
	[A]	[B]	[A x B]
Direct Material	( 2 feet x 30000 units)=60000 feet	$                   8.45	$     507,000.00
Direct labor	( 1.4 hours x 30000 units)=42000 hours	$                16.00	$     672,000.00
Variable Overhead	( 1.4 hours x 30000 units)=42000 hours	$                   2.50	$     105,000.00

• Requirements, with calculations

[1]

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                                8.45	-	$                       8.55	)	x	64000
	-6400
	Variance		$              6,400.00			Unfavourable-U
Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	60000	-	64000	)	x	$                           8.45
	-33800
	Variance		$            33,800.00			Unfavourable-U

[2]

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                              16.00	-	$                    15.80	)	x	43500
	8700
	Variance		$              8,700.00			Favourable-F
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	42000	-	43500	)	x	$                        16.00
	-24000
	Variance		$            24,000.00			Unfavourable-U

[3A]

Variable Overhead Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                                2.50	-	$                       2.48	)	x	43500
	750
	Variance		$                  750.00			Favourable-F
Variable Overhead Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	42000	-	43500	)	x	$                           2.50
	-3750
	Variance		$              3,750.00			Unfavourable-U

[3B]

--Working

	Hrs	Rate	Amount
Budgeted Fixed Overhead	35000	$                   6.00	$        210,000.00
Standard Fixed Overhead or Fixed Overhead absorbed	42000	$                   6.00	$        252,000.00
Actual Fixed Overhead incurred	43500		$        211,800.00

--Answers

Fixed Overhead Production Budget Variance
(	Budgeted Fixed Overhead	-	Actual Fixed Overhead incurred	)
(	$                   210,000.00	-	$          211,800.00	)
	-1800
	Variance		$              1,800.00			Unfavourable-U

Fixed Overhead Production Volume Variance
(	Standard Fixed Overhead or Fixed Overhead absorbed	-	Budgeted Fixed Overhead	)
(	$                   252,000.00	-	$          210,000.00	)
	42000
	Variance		$            42,000.00			Favourable-F