Question

Smooth Corporation is a small producer of paint. During June, the company produced 10,000 cases of paint. Each case contains 12 quarts of paint. To achieve this level of production, Smooth purchased and used 34,000 gallons of direct materials at a cost of $43,520. It also incurred average direct labor costs of $14 per hour for the 8,300 hours worked in June by its production personnel. Manufacturing overhead for the month totaled $21,000, of which $4,500 was considered fixed. Smooth’s standard cost information for each case of paint is as follows.

Direct materials standard price		1.32	per gallon
Standard quantity allowed per case		3.00	gallons
Direct labor standard rate		15.00	per hour
Standard hours allowed per case		0.80	direct labor hours
Fixed overhead budgeted		5,252	per month
Normal level of production		10,100	cases per month
Variable overhead application rate		1.60	per case
Fixed overhead application rate ($5,252 ÷ 10,100 cases)		0.52	per case
Total overhead application rate		2.12	per case

Instructions

a. Compute the materials price and quantity variances.

Materials price variances: 1360

Materials quantity variances: (5280)

b. Compute the labor rate and efficiency variances.

Labor rate variances: 8300

Efficiency variances: (4500)

c. Compute the manufacturing overhead spending and volume variances.

Overhead spending variances: 252

Overhead volume variances: (52)

d. What might have caused these variances? Who might be responsible? What questions would this bring up, and who might have the answers?

Answer 1

D. Causes of variances

1. Material price variance is the variance related to the change in the purchase price of materials. This is the responsibility of the purchase manager to monitor that purchases are made on the prices estimated by the management.

2. Material quantity variance is due to the excess quantity used of the materials used in the manufacturing of final product. Production department is directly responsible for such unfavorable variance in quanitiity used. This also shows that the materials are not being used efficiently.

3. Labor rate variace is due to the change in the rate of the labor per hour paid from budgeted to actual. The recruiting department is responsible for such a high rate of labor hours paid.

4. Labor efficiency variance is due to the excess hours incurred for producing the same unit of output. An unfavorable variance means that efficiency of the workers has decreased. Production department is directly responsible for such unfavorable variance. Moreover, it creates a question whether any training is required to be done for the workers to be more efficient.