Question
In: Accounting
Scooter Ltd manufactures scooters for the domestic market using a highly automated process. The company uses...
Scooter Ltd manufactures scooters for the domestic market using a highly automated process. The company uses a standard costing system for planning and control purposes and has prepared a standard cost sheet based on a practical capacity (denominator level) of 20,000 scooters (200,000 machine hours).
Standard Cost Sheet
Direct Materials (10 kg @$9.00 per kg)........................................................ $90.00
Direct Labour (3 hours @ $20.00 per hour).................................................. $60.00
Variable Overhead (10 machine hours @ $4.00 per machine hour) ............ $40.00
Fixed Overhead (10 machine hours @ $5.00 per machine hour)................. $50.00
Standard cost per barbecue ......................................................................... $240.00
The Manufacturing Department Budget was prepared based on the forecast need to manufacture 18,000 scooters. During the year, 20,000 scooters were actually made.
At year end, the manufacturing department (cost) performance report is as below:
........................................Actual Master Budget ..........@ Std Cost ................Variance
Number of units ......................20,000 .............................18,000 .....................2,000
Direct Materials ..................$2,576,500 .........................$1,620,000 ................$956,500 U
Direct Labour .....................$1,516,000............................ $1,080,000................ $436,000 U
Variable Overhead ...............$861,000 .........................$720,000 .....................$141,000 U
Fixed Overhead ..................$970,000 ............................$900,000 ...................$70,000 U
Total ..................................$5,923,500 .........................$4,320,000 ................$1,603,500 U
After viewing the report, the company CEO was concerned. He wants to know what is going on in the Manufacturing Department. The accountant has directed you to investigate the variances further. As part of your investigations, you have discovered the following:
335,000 kg of raw materials were purchased and used during the year;
72,000 direct labour hours were worked during the year;
210,000 machine hours were worked during the year;
During the year a factory supervisor retired and was not replaced;
Defective materials delivered by a supplier had gone undetected before use in production. This defective material caused the additional use of 30,000 kg of raw materials; 1,000 labour hours, and 2,500 machine hours to meet the required production.
REQUIRED: Calculate the following manufacturing variances for:
Direct materials price variance based on usage
Direct materials efficiency variance
Direct manufacturing labour price variance
Direct manufacturing labour efficiency variance
Variable manufacturing overhead spending variance
Variable manufacturing overhead efficiency variance
Fixed overhead spending variance
Production volume variance Indicate whether each variance is favourable or unfavourable.
b. Provide a short statement to the CEO regarding the potential causes of the following variance and a practical recommendation to address each variance: direct materials efficiency variance labour efficiency variance variable overhead efficiency variance
Solutions
Expert Solution
| Budgeted units of production | 20000 | |||||||||||
| Actual Units of Production | 18000 | |||||||||||
| SQ | Standard Quantity(Kg) for actual output | 180,000 | (10Kg*18000) | |||||||||
| AQ | Actual Quantity (Kg)of materials used | 335,000 | ||||||||||
| SP | Standard Price per Kg | $9.00 | ||||||||||
| AP | Actual Price per Kg | $7.69 | (2576500/335000) | |||||||||
| AQ*(AP-SP) | Direct Materials Price Variance | $438,500 | Favorable | (Actual Price is LESS than Standard Price) | ||||||||
| SP*(AQ-SQ) | Direct Materials Efficiency Variance | $1,395,000 | Unfavorable | (Actual quantity is MORE than Standard quantity) | ||||||||
| Total Material cost variance | $956,500 | Unfavorable | ||||||||||
| DIRECT LABOR VARIANCES | ||||||||||||
| SH | Standard Labor hour for actual output | 54000 | (3*18000) | |||||||||
| SR | Standard Labor rate per hour | $20.00 | ||||||||||
| AH | Actual labor hour used | 72000 | ||||||||||
| AR | Actual Labor rate per hour | $21.06 | (1516000/72000) | |||||||||
| AH*(AR-SR) | Direct labor Price Variance | $76,000 | Unfavorable | (Actual Rate is HIGHER than Standard Rate) | ||||||||
| SR*(AH-SH) | Direct Labor Efficiency Variance | $360,000 | Unfavorable | (Actual hour is MORE than Standard hour) | ||||||||
| Total Direct labor variance | $436,000 | Unfavorable | ||||||||||
| VARIABLE OVERHEAD VARIANCES | ||||||||||||
| SH | Standard Machine hour for actual output | 180000 | (10*18000) | |||||||||
| SR | Standard Overhead rate per hour | $4.00 | ||||||||||
| AH | Actual Machine hour used | 210000 | ||||||||||
| AR | Actual Overhead rate per hour | $4.10 | (861000/210000) | |||||||||
| 5 | AH*(AR-SR) | Variable Overhead Spending (Price) Variance | $21,000 | Unfavorable | (Actual Rate is More than Standard Rate) | |||||||
| 6 | SR*(AH-SH) | Varable Overhead Efficiency Variance | $120,000 | Unfavorable | (Actual hour is More than Standard hour) | |||||||
| FIXED OVERHEAD VARIANCES | ||||||||||||
| A | Budgeted Fixed Overhead | $14,000 | ||||||||||
| B | Budgeted labor hour | 2000 | (2*1000) | |||||||||
| C=A/B | Budgeted fixed overhead rate | $7 | ||||||||||
| D | Standard Labor hour for actual output | 2600 | (2*1300) | |||||||||
| E=C*D | Fixed overhead applied | $18,200 | ||||||||||
| A-E | Fixed Overhead Volume Variance | $4,200 | Unfavorable | |||||||||
| F | Budgeted Fixed Overhead | $900,000 | (20000*50) | |||||||||
| G | Actual Fixed Overhead | $970,000 | ||||||||||
| H=F-G | Fixed OverheadSpending Variance | $70,000 | Unfavorable |
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