Question

Marvel Parts, Inc., manufactures auto accessories. One of the company’s products is a set of seat covers that can be adjusted to fit nearly any small car. The company has a standard cost system in use for all of its products. According to the standards that have been set for the seat covers, the factory should work 1,075 hours each month to produce 2,150 sets of covers. The standard costs associated with this level of production are:

	Total		Per Set of Covers
Direct materials	$	54,825	$	25.50
Direct labor	$	10,750		5.00
Variable manufacturing overhead (based on direct labor-hours)	$	5,375		2.50
			$	33.00

During August, the factory worked only 800 direct labor-hours and produced 2,500 sets of covers. The following actual costs were recorded during the month:

	Total		Per Set of Covers
Direct materials (12,500 yards)	$	58,750	$	23.50
Direct labor	$	13,000		5.20
Variable manufacturing overhead	$	7,000		2.80
			$	31.50

At standard, each set of covers should require 3.0 yards of material. All of the materials purchased during the month were used in production.

Required:

1. Compute the materials price and quantity variances for August.

2. Compute the labor rate and efficiency variances for August.

3. Compute the variable overhead rate and efficiency variances for August.

(Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Answer 1

1. Compute the materials price and quantity variances for August.

1)Standard price of Materials per yard = $25.50 / 3 = $8.5

2)Actual Material used per set of covers = 12,500 / 2,500 = 5

3)Actual Price of Material per yard = $23.50 / 5 = $4.7

4) Total Standard Material Quantity = 3* 2,150 = 6,450

a) Material Price Variance = (Standard Unit cost - Actual Unit cost) * Actual Quantity purchased

= ($8.50 - $4.70) * 12,500

Material Price Variance = $47,500

The Actual Material cost is less than the Standard Material Cost and Hence the Material Price Variance is Favorable

b) Material Quantity Variance = (Standard Quantity - Actual Quantity ) * Standard Price

= (6,450 - 12,500) * $8.5

= $51,425

The Actual Material Quantity is more than the standard Material Quantity, so Material Quantity variance is unfavorable.

2. Compute the labor rate and efficiency variances for August.

1) Actual Labour Rate per hour = Total Actual Labour cost / Total Actual Labour hours = $13,000 / 800 = $16.25

2)Standard Labour Rate per hour = Total Standard Labour cost / Total Standard Labour hours = $10,750 / 1,075 = $10

3) Given Standard Labour Hours = 1,075

4) Given Actual Labour Hours = 800

a)Labour rate Variance = (Actual Rate - Standard Rate)* Actual Hours

= ($16.25 - $10 ) * 800

Labour rate Variance = $5000

The Actual Labour Cost is more than the Standard Labour Cost So the Labour Rate Variance is Unfavorable

b) Labour Efficiency Variance = (Actual Hours - Standard Hours) * Standard Rate

= (800 - 1,075)* $10   

Labour Efficiency Variance = $2,750

Here, the actual Labour hours are less than the standard labour hours and hence the Labour efficiency rate is Favorable.

3. Compute the variable overhead rate and efficiency variances for August.

1) Actual Labour Rate per hour = Total Actual Variable Overhead cost / Total Actual Overhead hours = $7,000 / 800 = $8.75

2)Standard Labour Rate per hour = Total Standard Labour cost / Total Standard Overhead hours = $5,375 / 1,075 = $5

3) Given Standard Labour Hours = 1,075

4) Given Actual Labour Hours = 800

a) Variable overhead Rate Variance = (Actual Overhead Rate - Standard Overhead rate) *Actual Overhead hours

= ($8.75 - $5) * 800

Variable overhead Rate Variance = $3,000

Here, Actual Overhead rate is more than the standard overhead rate and hence Variable overhead variance is Unfavorable

b) Variable Overhead Efficiency Variance = (Actual Variable overhead Hours - Standard Variable Overhead Hours)* Standard Overhead Rate

= (800 - 1,075) * $5

Variable Overhead Efficiency Variance = $1,375

Actual Variable Overhead Hours are less than the Standard Variable overhead hours and hence Variable overhead efficiency variance is favorable.