Question

Queenstown Baggage Limited has developed the following cost standards for the production of its leather backpacks:

	Standard cost per backpack
Leather (0.9 metre x $22 per metre)	$19.80
Direct labour (1.3 hours x $9 per hour)	$11.70
Variable overhead (1.3 hours x $15 per hour)	$19.50

Variable overhead at the company is applied on the basis of direct labour hours. The actual results for last month were as follows:

Number of backpacks produced	15,000
Direct labour hours incurred	18,800
Metres of leather purchased	14,500
Metres of leather used in production	14,100
Cost of leather purchased	$306,675
Direct labour cost	$159,800
Variable overhead cost	$285,760

Required:

i. Calculate the materials price variance, and mention three potential reasons for the variance result.

ii. Calculate the materials quantity variance, and mention three potential reasons for the variance result

iii. Calculate the labour efficiency variance, and mention three potential reasons for the variance result

iv. Joshwood Slovakia has recently joined Kerikeri Baggage Limited, a sister company of Queenstown Baggage Limited, as a Business Analyst. While going through last year’s variance analysis report, he found that the company uses direct labour hours as the basis for applying variable manufacturing overhead costs. He also found that, last year, the company’s labour efficiency variance was unfavourable. However, he noticed that variable overhead efficiency variance was missing in the last year’s report. Joshwood wonders whether the last year’s variable overhead efficiency variance was favourable or unfavourable. What do you think, and why? [Maximum word limit: 120 words].

Answer 1

(i)

Formula for Material Price Variance = Actual quantity used X ( Standard Price - Actual Price )

Actual quantity used = 14100 meters

Standard price per meter = $22 / meter

Actual price per meter = $306675 / 14500 meters = $21.15 / meter

Material Price Variance = 14100 meters X ( 22 - 21.15 ) = $11985 ( Favourable )

Reasons for the variance results

(1) Price of the material

The material price variance can be favourable cause there can be a decrease in the price of the material in the market. These can be done due to the excess supply of material in the market.

(2) Quality of material

If the quality of the material is inferior than the quality of the material the comapany usally purchased then it can lead to the favourable balance of raw material price variance. Cause the raw material price certainly be decresed.

(3) Bergain power of the company

If the comapny is bargained well with the supplier then also the price of the material decreased. Hebce, there is a favourable balance of material price variance.

(ii)

Formula for Material Quantity Variance = Standard Price per meter X ( Standard Quantity - Actual Quantity )

Standard Quantity = ( 15000 units X 0.9 meter/ unit ) = 13500 meters

Actual Quantity = 14100 meters

So, the Material Quantity Variance = $22/ meter X ( 13500 - 14100 ) = $13200 ( Unfavourable )

Reasonse For Unfavourable Quantity Variance

(1) Use of sub-standard material

Use of sub standard or defective material could be a reason for unfavourable quantity variance. Cause due to this reason the usage of raw material can be increased.

(2) Wastage

This could be an another reason for the unfavourable balance of raw material quantity variance.

(3) Faulty production process

Due to the faulty production process the products cannot pass the quality standard of the company and there is new material is required to produce new good quality product,. This is an another reason of Unfavourable reason.

(iii)

Labour efficiency variance = Standard rate per labour hour X ( Standard labour hours - Actual labour hours )

Standard rate per labour hour = $9 / labour hour

Standard labour hours = ( 15000 Units X 1.3 labour hours / unit) = 19500 labour hours

Actual Labour Hours = 18800 labour hours

Labour efficiency variance = $9 X ( 19500 - 18800 ) = $6300 ( favourable)

Reasonse for favourable labour efficiency variance

(1) Well planned labour mix

It can be said that there can be a well planned labour mix of effcient and inefficient labour mix. Thats why the labour force is used efficeiently efficiently by the company and results are optimized.

(2) Less Idle time It can also be said that the dle time of the company is less than the standard set by the company thats why the efficiency balance of labour is favourable.

(3) Good working condition May be the working condition of the company is good thats why the productivity of the labour force increased which leads to the favourable efficiency balance of labour.

(iv)

Formula for Variable Overhead Efficiency Variance

= Standard rate per labour hour X ( Standard labour hour - Actual labour hour)

It is said in the question that the rate of variable overhead is based on the labour hours and it is also given in the question that the labour efficiency variance is unfavourable. Now, labour efficiency variance unfavourable means that the standard labour hours is less than the actual labour hours. So, from this we can say that the variable overhead efficiency variance will alo be unfavourable cause the same data of standard labour hours and actual labour hours will be used to determine the variable overhead efficiency variance as it is used to determine teh labour efficiency varince. The only difference will be between the standard rate of labour hours and standard rate of variable overhead hours based on labour hours. But this has null effect on the variable overhead efficiency variance. So, the variable overhead efficiency variance wil be unfavourable.