Question

The Hiroole Company produces rubber seals used in the aerospace industry. Standards call for 3 pounds of material at $2.47 per pound for each seal. The standard cost for labor is 1.5 hours at $15.00 per hour. Standard overhead is $10.00 per unit. For the year 2018, expected production is 128,600 seals with fixed overhead of $128,600 and variable overhead of $9.00 per seal. During 2018, a total of 125,000 seals were produced. The company purchased 455,000 pounds of material for $1,142,050. Production required 426,200 pounds of material. The cost of direct labor incurred was $2,900,000 with an actual average wage rate of $15.25 per hour. Actual overhead for the year was $974,000. Determine the standard cost per seal. Calculate the material, labor, and overhead variances. Prepare a variance summary. Material Price Variance$ Material Quantity Variance Labor Rate Variance Labor Efficiency Variance Controllable Overhead Variance Overhead Volume Variance Total$ Indicate which variances should be investigated.

Answer 1

CALCULATION OF STANDARD COST PER SEAL

MATERIAL COST PER SEAL $7.41

LABOR COST PER SEAL $22.5

VARIABLE OVERHEAD PER SEAL $9

FIXED OVERHEAD PER SEAL $1

STANDARD COST PER SEAL $39.91

[NOTE:

MATERIAL COST PER SEAL = 3 POUNDS × $2.47/POUND

LABOR COST PER SEAL = 1.5 HOURS × $15/HOUR

VARIABLE OVERHEAD PER SEAL = $9 (GIVEN)

FIXED OVERHEAD PER SEAL = $128600/128600 = $1 ]

CALCULATION OF VARIANCES

MATERIAL PRICE VARIANCE

MATERIAL PRICE VARIANCE = (AUCTUAL PRICE - STANDARD PRICE) × AUCTUAL QUANTITY CONSUMED

= ($2.51 - 2.47) × 426200

= $17048

[ NOTE: AUCTUAL PRICE = $1142050/$455000 ]

MATERIAL QUANTITY VARIANCE

MATERIAL QUANTITY VARIANCE = (AUCTUAL QUANTITY - STANDARD QUANTITY) × STANDARD PRICE

=($426200 - $375000) × $2.47

=$126464

[ NOTE: STANDARD QUANTITY = 3 POUNDS × 125000 SEALS ]

LABOR RATE VARIANCE

LABOR RATE VARIANCE = (AUCTUAL RATE - STANDARD RATE) × AUCTUAL HOURS WORKED

=($15.25 - $15) × 190164

=$47541

[NOTE: AUCTUAL HOURS WOURKED = $2900000/$15.25]

LABOR EFFICIENCY VARIANCE

LABOR EFFICIENCY VARIANCE=(AUCTUAL HOURS WORKED -STANDARD HOURS WORKED)×STANDARD RATE

=(190164- 187500) × $15

=$39960

[NOTE: STANDARD HOURS WORKED = 125000 SEALS × 1.5 HOURS/SEAL]

CONTROLLABLE OVERHEAD VARIANCE

CONTROLLABLE OVERHEAD VARIANCE = BUDGETED LEVEL OF OVERHEAD FOR AUCTUAL PRODUCTION- AUCTUAL OVERHEAD INCURRED

= $974000 - ($974000 - (128600 + 9 × 125000))

=$1253600

OVERHEAD VOLUME VARIANCE

OVERHEAD VOLUME VARIANCE = OVERHEAD APPLIED USING STANDARD RATE - BUDGETED LEVEL OF

OVERHEAD FOR AUCTUAL OVERHEAD FOR AUCTUAL PRODUCTION

=(128600 + 9 × 125000) - (10 × 125000)

=$3600

FROM THE ABOVE CALCULATIONS WE CONCLUDE THAT

MATERIAL PRICE VARIANCE = $17048 [UNFAVOURABLE]

MATERIAL QUANTITY VARIANCES = $126464 [ UNFAVOURABLE]

LABOR RATE VARIANCE = $ 47541 [UNFAVOURABLE]

LABOR EFFICIENCY VARIANCE = $39960 [UNFAVOURABLE]

CONTROLLABLE OVERHEAD VARIANCE = $ 1253600 [FAVOURABLE]

OVERHEAD VOLUME VARIANCE = $3600 [UNFAVOURABLE]

HENCEFORTH, HIROOLE COMPANY NEEDS TO INVESTIGATE ALL VARIANCES EXCEPT CONTROLLABLE OVERHEAD VARIANCE BECAUSE ALL VARIANCES EXCEPT CONTROLLABLE OVERHEAD VARIANCE ARE UNFAVOURABLE. ONLY CONTROLLABLE OVERHEAD VARIANCE IS FAVOURABLE.