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 $28,600 overall manufacturing cost variance is only 1.6% of the $1,787,500 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	3.50 feet	$	2.50	per foot	$	8.75
Direct labor	2.1 hours	$	12	per hour		25.20
Variable overhead	2.1 hours	$	2.00	per hour		4.20
Fixed overhead	2.1 hours	$	6.00	per hour		12.60
Total standard cost per unit					$	50.75

The following additional information is available for the year just completed:

1. The company manufactured 15,000 units of product during the year.
2. A total of 50,000 feet of material was purchased during the year at a cost of $2.75 per foot. All of this material was used to manufacture the 15,000 units produced. There were no beginning or ending inventories for the year.
3. The company worked 33,000 direct labor-hours during the year at a direct labor cost of $11.75 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)		30,000
Budgeted fixed overhead costs	$	180,000
Actual variable overhead costs incurred	$	75,900
Actual fixed overhead costs incurred	$	176,200

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

1.

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

Material price variance = ($2.75 - $2.50) * 50,000 = $12,500 Unfavorable

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

Material quantity variance = (15,000*3.50 - 50,000) * $2.50

Material quantity variance = (52,500 - 50,000) * $2.50 = $6,250 Favorable

2.

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

Labor rate variance = ($11.75 - $12) * 33,000 = $8,250 Favorable

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

Labor efficiency variance = (15,000*2.1 - 33,000) * $12

Labor efficiency variance = (31,500 - 33,000) * $12 = $18,000 Unfavorable

3a.

Variable overhead rate variance = (Actual rate - Standard rate) * Actual hours

Variable overhead rate variance = ($75,900/33,000 - $2) * 33,000

Variable overhead rate variance = ($2.3 - $2) * 33,000 = $9,900 Unfavorable

Variable overhead efficiency variance = (Standard hours - Actual hours) * Standard rate

Variable overhead efficiency variance = (15,000*2.1 - 33,000) * $2

Variable overhead efficiency variance = (31,500 - 33,000) * $2 = $3,000 Unfavorable

3b.

Fixed overhead budget variance = Actual fixed overhead - Budgeted fixed overhead

Fixed overhead budget variance = $176,200 - $180,000 (30,000*$6) = $3,800 Favorable

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

Fixed overhead volume variance = (15,000*2.1*$6) - $180,000

Fixed overhead volume variance = $189,000 - $180,000 = $9,000 Favorable