Question

What is the actual cost per unit produced and what is the primary cause of the difference between actual cost per unit produced in the framing department and the standard price per frame? (Volume Variance, Efficiency Variance or Price Variance)

Should the framing department be held responsible for the poor performance of the framing division? Explain Why or why not?

Use the scenario below to help with the questions:

DeFleur manufactures bicycles. The bicycles are manufactured in two divisions. In the framing division, the carbon bicycle frames are manufactured. In the assembly division, the components are assembled to the frame and the bike is ready for sale. There is no market for the unassembled frames and all manufactured frames are transferred to the assembly division. For the purposes of performance evaluation, the framing division transfers the completed frames to the assembly division at the budgeted standard cost of a frame. The budgeted units of production for the framing division is 1,000, all of which will be transferred to the assembly division at the standard full absorption cost.

The budgeted costs for the framing division are as follows:

Direct Materials per unit: 10 layers of carbon-fiber at $20/layer	$200.00
Direct Labor per unit: 8 hours at $12/hour	$96.00

1.  Standard variable overhead is applied to products on the basis of direct labor hours at a rate of $4/unit produced.

Budgeted Fixed Overhead is $30,000 and the standard fixed cost per unit is based on the budgeted units of production.

Actual data for the period relating to the costs are as follows:

The actual number of units produced was	800
Actual Fixed Overhead costs were	$32,000
Actual Variable Overhead costs	$4,000

2. The framing division worked 7,500 direct labor hours during the year at a total cost of $93,750.

3.  A total of 9,000 carbon-fiber layers were purchased and used in production during the year at a total cost of $171,000

4. Total Budgeted cost for the framing department was $330,000. The total actual cost was $300,750

(Note that all the questions on variance are with respect to the framing department.)

Answer 1

1) Actual Cost per unit = Total actual cost / Actual No of Units produced

= 300750/800

= $375.9375

2) Standard price per frame = Budgeted cost / budgeted units

= $330000/1000

=$330

3) Material Usage Variance = (Standard Quantity *Standard Price) minus (Standard Price* Actual quantity)

= (20*10000) - (20*9000)

= 20000F

4) Material Price Variance = (Standard Price * Actual quantity ) minus ( Actual Price * Actual quantity)

=(20*9000) - (19*9000)

=9000F

5) Labour Efficiency Variance = (Standard Hours *Standard Rate) minus (Standard Rate* Actual Hours)

= (8000*12) - (12*7500)

= 6000F

6) Labour Rate Variance = (Standard Rate * Actual Hours) minus ( Actual Rate * Actual Hours)

=(12*7500) - (12.5*7500)

= 3750 A

7) Total Fixed Overhead Variance = Budgeted Fixed Overheads - Actual fixed Overhead

= 30000-32000

=2000A

8) Total Variance = 20000F +9000F +6000F +3750A +2000A

=29250F (or $330000- $300750)

9) Difference between actual price per unit and standard price per unit = $375.9375- $330

= $45.9375

No Difference in per unit price in case the difference between Budgeted cost and Actual cost would have between $66000($330*200), 200 being difference in quantities.

But the difference between the cost is $29250 as calculated above.

$36750 (being difference between $66000 and $29250 ) is absorbed to 800 units. Thus, increasing the cost to $45.9375 per unit($36750/800)

10) Yes, the framing department should be held responsible for poor performace as operation ineffencies have increased per unit costs.