Question

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

Answer 1

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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