Question

2. Variance Analysis

Nail_It company is a manufacturer of a custom engraved hammers. For the year 2021, the weekly budget was as follows.

• Sales revenue $64,000: 2,000 hammers × price $32
• Variable costs:
  • Direct materials $10,000: 2,000 hammers × 1 lbs per hammer × price $5/lb
  • Direct labour $50,000: 2,000 hammers × 5 hour per hammer × rate $5/hour
  • no variable overhead
• Fixed costs: $3,000
• Profit: $1,000

The actual performance of the week was as follows.

• Sales revenue $70,400: 2,200 hammers × price $32
• Variable costs:
  • Direct materials $13,200: 2,200 hammers × 1 lbs per hammer × price $6/lb
  • Direct labour $46,200: 2,200 hammers × 3 hour per hammer × rate $7/hour
  • no variable overhead
• Fixed costs: $8,000
• Profit: $8,000

Required:

1) Compute the following variances

a) Spending and Volume Variances of Materials

b) Spending and Volume Variances of Labour

c) Spending and Volume Variances of Fixed Overhead

d) Materials Quantity Variance

e) Materials Price Variance

f) Labour Efficiency Variance

g) Labour Rate Variance

2) Nail_It company hired an experienced engineer and asked her to re-organize the production process. How could hiring an experienced engineer and their new production process explain the variances? Please comment on individual components of variances, their relations to other variances, and overall impact on profitability.

Answer 1

	Budget	Actual
	(Original)	Result
Price	$5/ lbs	$6/lbs
Quantity	2000lbs	2200lbs
Hours	10000	6600
Rate	$5	$3
Output	$2,000	$2,200
Sales per unit	$32	$32
Direct Materials	$10,000	$13,200
Direct Labour	$50,000	$46,200
Variable Overheads	$0	$0
Fixed Cost	$3,000	$8,000
profit	$1,000	$8,000
VOLUME VARIANCE OF MATERIAL
	(Actual unit quantity consumed - Budgeted unit quantity consumed) x Budgeted cost per unit
(2200-2000) X 5
1000 (favorable)
VOLUME VARIANCE OF LABOR
	(Actual labor hours - Budgeted labor hours) x Budgeted cost per hour
(6600-10000) X 5
17000 (adverse)
MATERIAL PRICE VARIANCE
MVP	(Standard Price-Actual Price)x Actual Quantity
(5-6) X 2200
2200 (Adverse)
MATERIAL QUANTITY VARIANCE
MQV	(Standard Quantity for Actual Output-Actual Quantity)x Standard Price
(2000-2200) X 5
1000 (Adverse)
LABOR RATE VARIANCE
LRV	(Standard Rate per Hour -Actual Rate per Hours)x Actual Hours
(5-3) X 6600
13200 (favorable)
LABOR EFFICIENCY VARIANCE
LEV	(Standard Hour for Actual Output-Actual Hours)x Standard Rate
(10000-6600) X 5
17000 (favorable)