Question

Adams Manufacturing Company produces a component part of a top secret military communication device. Standard production and cost data for the part, Product X, follow:

Planned production		24,000	units
Per unit direct materials		3.30	pounds	@	$	1.60	per pound
Per unit direct labor		2.20	hours	@	$	7.30	per hour
Total estimated fixed overhead costs	$	547,200

Adams purchased and used 82,960 pounds of material at an average cost of $1.65 per pound. Labor usage amounted to 50,780 hours at an average of $7.42 per hour. Actual production amounted to 24,700 units. Actual fixed overhead costs amounted to $580,200. The company completed and sold all inventory for $1,900,000.

Required

1. Prepare a materials variance information table showing the standard price, the actual price, the standard quantity, and the actual quantity.

2. Calculate the materials price and usage variances. Indicate whether the variances are favorable (F) or unfavorable (U).

3. Prepare a labor variance information table showing the standard price, the actual price, the standard hours, and the actual hours.

4. Calculate the labor price and usage variances. Indicate whether the variances are favorable (F) or unfavorable (U).

5. Calculate the predetermined overhead rate, assuming that Adams uses the number of units as the allocation base.

6. Calculate the fixed cost spending and volume variances and indicate whether they are favorable (F) or unfavorable (U).

7. Determine the amount of gross margin Adams would report on the year-end income statement.

Answer 1

1.

Standard price	$1.60 per pound
Actual price	$1.65 per pound
Standard quantity (24,700*3.30)	81,510 pounds
Actual quantity	82,960

2.

Material price variance = (Standard price - Actual price) * Actual quantity

Material price variance = ($1.60 - $1.65) * 82,960 = $4,148 Unfavorable

Material quantity variance = (Standard quantity - Actual quantity) * Standard price

Material quantity variance = (81,510 - 82,960) * $1.60 = $1,450 Unfavorable

3.

Standard price	$7.30 per hour
Actual price	$7.42 per hour
Standard hours (24,700*2.20)	54,340 hours
Actual hours	50,780 hours

4.

Labor price variance = (Standard price - Actual price) * Actual hours

Labor price variance = ($7.30 - $7.42) * 50,780 = $6,093.6

Labor efficiency variance = (Standard hours - Actual hours) * Standard price

Labor efficiency variance = (54,340 - 50,780) * $7.30 = $25,988 Favorable

5.

Predetermined overhead rate = Budgeted overhead cost / Total number of units

Predetermined overhead rate = $547,200 / 24,000 = $22.8 per unit

6.

Fixed cost spending variance = Actual fixed overhead - Budgeted fixed overhead

Fixed cost spending variance = $580,200 - $547,200 = $33,000 Unfavorable

Fixed cost volume variance = Budgeted fixed overhead - Applied fixed overhead

Fixed cost volume variance = $547,200 - (24,700*$22.8) = $15,960 Favorable

7.

Gross margin:

Sales revenue		$1,900,000
Less: Cost of goods sold:
Direct material (82,960*$1.65)	136,884
Direct labor (50,780*$7.42)	376,788
Fixed overhead cost	580,200	1,093,872
Gross margin		$806,128