Question

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

Abbrevations used

AQ - Actual Quantity

SQ - Standard Quantity for actual output

AP - Actual Price

SP - Standard Price

AM - Actual Minutes used

AR - Actual Rate

SM - Standard Minutes for actual output

SR - Standard Rate

Direct Materials given information

Actual output 1200 Ltrs				Standard data for 1 Ltr				Standard data for Actual output = 1200 Ltrs
	Coconuts	Bottles	Labels			Coconuts	Bottles	Labels			Coconuts	Bottles	Labels
Actual Quantity	6,000	1,300	1,400		Standard Quantity	4	1	1		Standard for actual Quantity (AQ * SQ)	4,800	1,200	1,200
Actual Cost ($)	9,600	676	980		Standard Price	1.50	0.50	0.75		Standard Price	1.50	0.50	0.75
Actual Price ($)	1.60	0.52	0.70

1. Direct Material cost variance

= (SQ * SP) - (AQ * AP)

Coconuts= (4800 * 1.50) - (6000 * 1.60) = $ 2,400 (U)

Bottles= (1200 * 0.50) - (1300 * 0.52) = $ 76 (U)

Labels= (1200 * 0.75) - (1400 * 0.70) = $ 80 (U)

2. Direct Material Price Variance

= (SP - AP) * AQ

Coconuts = (1.50 - 1.60) * 6000 = $ 600 (U)

Bottles = (0.50 - 0.52) * 1300 = $ 26 (U)

Labels = (0.75 - 0.70) * 1400 = $ 70 (F)

3. Direct Material Quantity Variance

= (SQ - AQ) * SP

Coconuts = (4800 - 6000) * 1.50 = $ 1,800 (U)

Bottles = (1200-1300) * 0.50 = $ 50 (U)

Labels = (1200 - 1400) * 0.75 = $ 150 (U)

Direct Labor given information

Actual time (minutes)	18,000		Standard time (Minutes)	20		Standard for actual Output	24,000
Actual Labor cost ($)	3,750		Standard Rate per minute	0.20		Standard Rate per minute	0.20
Actual Rate per minute	0.21		(12/60)

4. Direct Labor Cost Variance

= (SM * SR) - (AM * AR)

= (24,000 * 0.20) - (18,000 * 0.21)

= $ 1,020 (F)

5. Direct Labor rate variance

= (SR - AR) * AM

= (0.20 - 0.21) * 4,800

= $ 180 (U)

6. Direct Labor Efficiency Variance

= (SM - AM) * SR

= (24000 - 18000) * 0.20

= $ 1200 (F)