Question

Marvel Parts, Inc., manufactures auto accessories. One of the company’s products is a set of seat covers that can be adjusted to fit nearly any small car. The company has a standard cost system in use for all of its products. According to the standards that have been set for the seat covers, the factory should work 1,230 hours each month to produce 2,050 sets of covers. The standard costs associated with this level of production are:

	Total		Per Set of Covers
Direct materials	$	27,675	$	13.50
Direct labor	$	8,610		4.20
Variable manufacturing overhead (based on direct labor-hours)	$	4,920		2.40
			$	20.10

During August, the factory worked only 750 direct labor-hours and produced 1,500 sets of covers. The following actual costs were recorded during the month:

	Total		Per Set of Covers
Direct materials (3,900 yards)	$	19,500	$	13.00
Direct labor	$	6,600		4.40
Variable manufacturing overhead	$	4,800		3.20
			$	20.60

At standard, each set of covers should require 1.8 yards of material. All of the materials purchased during the month were used in production.

Required:

1. Compute the materials price and quantity variances for August.

2. Compute the labor rate and efficiency variances for August.

3. Compute the variable overhead rate and efficiency variances for August.

Answer 1

Solution

Marvel Parts Inc

1. Computation of material price and quantity variances for August:

Material price variance = actual quantity x (AR – SR)

Standard rate per yard, SR = $13.50/1.80 yards of material = $7.50 per yard

Actual rate per yard, AR = $19,500/3,900 = $5 per yard

Actual quantity of yards purchased = 3,900

Material price variance = 3,900 x ($5 - $7.50) = $9,750 F

The material price variance is Favorable, as the actual cost per unit is less than the standard cost.

Material quantity variance:

Material quantity variance = SR x (AQ – SQ)

SR = $7.50 per yard
AQ = 3,900 yards

SQ = 1,500 sets of covers x 1.8 yards per unit = 2,700

= $7.50 x (3,900 – 2,700) = $9,000 U

The material quantity variance is unfavorable as the actual quantity is higher than the standard quantity.

2. Computation of labor rate and efficiency variances for August:

Labor rate variance = AH x (AR – SR)

AH – actual hours = 750 hours

AR = $6,600/750 DLH = $8.80 per hour

SR = standard labor cost per hour = $8,610/1,230 DLH = $7

Labor rate variance = 750 x ($8.80 - $7) = $1,350 U

The labor rate variance = $1,350 U

The labor rate variance is unfavorable, as the actual labor rate is higher than the standard rate.

Labor efficiency/quantity variance = SR x (AH – SH)

SR = $7 per hour

AH = 750

SH = standard hours per unit x actual output = (1,230 hours/2,050 units) x 1,500 units = 0.60 hours per unit x 500

Labor efficiency variance = $7 x (750 – 900) = $1,050 F

The labor efficiency variance is favorable as the actual hours are less than estimated standard hours per unit.

3. Computation of variable overhead rate and efficiency variances:

Variable overhead rate variance = acutal labor hours x (actual VOH rate per DLH – budgeted OH rate per DLH)

AH = 750

AVOHR = $4,800/750 = $6.40 per DLH

SVOHR = $4,920/1,230 dLH = $4

Variable overhead rate variance = 750 x ($6.40 - $4) = $1,800 U

The variable overhead rate variance is unfavorable as the actual variable overhead rate per hour is higher than the standard VOH rate per hour.

Variable OH efficiency variance –

= SVOHR x (AH – SH)

= $4 x (750 – 900) = $600 F

The variable OH efficiency variance is Favorable as the actual labor hours used is less than standard labor hours.