Question

Question 4

One of the practices that you have noted about the operations of Saddleback Farms is that the company depends on historical and actual costs to analyze results.  You encouraged Mr. Livingstone to adopt a standard costing system and conducted a study based on which you recommended the following standards for the Coconut water processing system.

Standard Costs for one (1) liter of Coconut Water

                  Coconuts                                                                     4 @ $1.50 per coconut                    $6.00

                  Bottles                                                                          1 @ $0.50 per bottle                        0.50

                  Machine time 5 minutes @ $30 per hour 2.50

                  Labels                                                                           1 @ $0.75 per label                         0.75

                  Direct labor 20 minutes @ $12 per hour 4.00

                  Total standard costs                                                                                                          $13.75

At the end of June 2019, one month after implementation, you discovered that Saddleback Farms processed 1,200 liters of coconut water and incurred the following costs:

Actual Costs incurred for the Month

                                    Coconuts used                     6,000                                         $ 9,600

                                    Bottles used                         1,300                                               676

                                    Machine time                       7,200 minutes 3,744

                                    Labels                                  1,400                                               980

                                    Direct labor                          18,000 minutes                            3,750

                                    Total cost                                                                              $18,750

Required: Prepare all material and labor variances for Saddleback Farms for June (include price, quantity, rate and efficiency variances) and explain to Mr. Livingstone what happened.                           

Answer 1

Note:

1. All the workings have been done based on quantity processed.
2. The standard rate and actual rate are hourly based for machine time and direct labor.
3. All the negative variance is labelled as unfavourable and positive variance is labelled as favourable.
4. I have explained the answer in detail. If you still have any doubt, feel free to ask in comment section.