Question

The Leonard Company uses standard costs in its factory.   The standard cost to produce one unit is as follows:

               Direct materials (1 g × $32/g)                                                   $32

               Direct labor (1.5 hours x $20 per hour)                                       30

               Variable overhead (1.5 direct labour hours x $10 per hour)       15

               Fixed Overhead (1.5 direct labour hours x $16 per hour)           24

                                                                                                                $101

Standards are based on normal monthly production involving 9,000 direct labor hours (6,000 units). The actual results for the most recent month are:

               Direct materials purchased and used (5,300 g × $33/g)              $ 174,900

               Direct labor (8,400 hours)                                                              176,400

               Actual fixed factory overhead                                                        135,000

               Actual variable factory overhead                                                   100,000

A total of 5,000 units were produced and sold during the month.

1. What was the Direct Materials Price Variance for the month?

1. $9,600 U
2. Unable to calculate with data given
3. $5,300 F
4. $5,300 U

2. What was the Direct Labour Efficiency Variance for the month?

1. $18,000 U
2. $12,000 U
3. $12,000 F
4. $18,900 U

3. What was the Variable Overhead Price (Rate) Variance for the month?

1. $16,000 F
2. $16,000 U
3. $25,000 F
4. $ 9,000 F

4. What was over or under-applied variable overhead for the month?

1. $100,000 over applied
2. $ 75,000 under applied
3. $ 25,000 under applied
4. $ 25,000 over applied

5. What was the Fixed Overhead Production Volume Variance for the month?

1. $ 24,000 U
2. $120,000 U
3. $144,000 U
4. $ 24,000 F

6. What would be a possible reason for an unfavourable Direct Labour Efficiency Variance?

1. One of the machines broke down and a batch had to be scrapped.
2. The worker’s hourly rate of pay increased.
3. The rates for payroll taxes like CPP and EI increased.
4. The supervisors’ salaries were increased.

Answer 1

Answer:

Data for Various variance

Budget (Standard)    Revised Budget Actual data

	Per Unit	Total cost ($)		For 5000 units	Total Cost ($)		For 5000 Units	Total Cost ($)
Direct Material	1 g	32		5,000 g	160,000		5,300 g	174,900
	@ $ 32 per g			@ $ 32 per g			@ $ 33 per g
Direct labour	1.5 hours	30		7,500 hours	150,000		8,400 hours	176,400
	@ $ 20 per hour			@ $ 20 per hour			@ $ 21 per hour ($176400/8400)
Variable overhead	1.5 hours	15		7,500 hours	75,000		8,400 hours	100,000
	@ $ 10 per hour			@ $ 10 per hour			@ $ 11.90476190 per hour ($100000/8400)
Fixed overhead	1.5 hours	24		7,500 hours	120,000		8,400 hours	135,000
	@ $ 16 per hour			@ $ 16 per hour

1. Direct Material Price variance = ( SP - AP ) * AQ

= ($ 32 - $ 33) * 5,300 g

= ( - $ 1 ) * 5,300 g

= $ 5,300 U

Here, the correct answer is (D) $ 5,300 U.

Note:

Where, SP is the standard unit price of direct material

AP is the actual unit price of direct material

AQ is the actual quantity of direct material used

2. Direct Labour Efficiency Variance = ( SH - AH ) * SR

= ( 7,500 - 8,400 ) * $ 20

= ( - 900 ) * $ 20

= $ 18,000 U

Here, the correct answer is (A) $ 18,000 U

Note:

Where, SH are the standard direct labour hours allowed ( Standard direct labour hours per unit * Actual number of finished units produced )

AH are the actual direct labour hours used

SR is the standard direct labour rate per hour

  

3. Variable Overhead Price (Rate) Variance = ( SR - AR ) * AH

= ( $ 10 - $ 11.9047619047619 ) * 8,400

= ( - $ 1.9047619047619 ) * 8,400

= $ 16,000 U

Here, the correct answer is (B) $ 16,000 U

Note:

Where, SR is the standard variable overhead rate

AR is the actual variable overhead rate

AH are the actual direct labour hours of allocation base

4. Over or Under Applied variable overhead:

As per the Revised budget the budgeted variable overhead for actual output is $ 75,000

However the actual variable overhead for actual output is $ 100,000

Since, the company charged off only $ 75,000, it has Under applied overhead.

the variable overhead is under applied by $ 25,000

Here, the correct answer is (C) $ 25,000 underapplied.

5. Fixed Overhead Production Volume Variance = Budgeted fixed overhead -Fixed overhead applied

= $ 144,000 - $ 120,000

= $ 24000 F

Here, the correct answer is (D) $ 24,000 F.

Note:

Where, Budgeted Fixed overhead = standard direct labour hours * Fixed overhead recovery rate per hour

= 9000 * $ 16

= $ 144,000

Fixed overhead applied = Fixed overhead recovery rate per hour * ( Actual output * Standard hours per unit )

= $ 16 * ( 5000 units * 1.5 hours )

= $ 120,000

6. Possible reason for an Unfavourable Direct labour efficiency variance:

The correct answer is (A) One of the machines broke down and a batch had to be scrapped.

The main reason for Unfavourable labour efficiency variance is higher of actual labour hours than standard labour hours for actual output.

Due to machine break down the actual labour hours for actual output will increase.

Here, the other three options are not correct, because an increase in workers hourly rate, increase in payroll taxes and increase in supervisors salaries would not affect the actual labour hours required for actual output.