Question

"Wonderful! Not only did our salespeople do a good job in meeting the sales budget this year, but our production people did a good job in controlling costs as well,” said Kim Clark, president of Martell Company. “Our $29,250 overall manufacturing cost variance is only 1.0% of the $2,925,000 standard cost of products made during the year. That's well within the 3% parameter set by management for acceptable variances. It looks like everyone will be in line for a bonus this year." The company produces and sells a single product. The standard cost card for the product follows: Inputs (1) Standard Quantity or Hours (2) Standard Price or Rate Standard Cost (1) × (2) Direct materials 2.50 feet $ 3.30 per foot $ 8.25 Direct labor 2.3 hours $ 10 per hour 23.00 Variable overhead 2.3 hours $ 3.00 per hour 6.90 Fixed overhead 2.3 hours $ 5.00 per hour 11.50 Total standard cost per unit $ 49.65 The following additional information is available for the year just completed: The company manufactured 25,000 units of product during the year. A total of 60,000 feet of material was purchased during the year at a cost of $3.70 per foot. All of this material was used to manufacture the 25,000 units produced. There were no beginning or ending inventories for the year. The company worked 60,000 direct labor-hours during the year at a direct labor cost of $9.60 per hour. Overhead is applied to products on the basis of standard direct labor-hours. Data relating to manufacturing overhead costs follow: Denominator activity level (direct labor-hours) 55,000 Budgeted fixed overhead costs $ 275,000 Actual variable overhead costs incurred $ 186,000 Actual fixed overhead costs incurred $ 270,000 Required: 1. Compute the materials price and quantity variances for the year. 2. Compute the labor rate and efficiency variances for the year. 3. For manufacturing overhead compute: a. The variable overhead rate and efficiency variances for the year. b. The fixed overhead budget and volume variances for the year.

Answer 1

• Working

Actual DATA for		25000	units
	Quantity (AQ)	Rate (AR)	Actual Cost
Direct Material	60000	$                   3.70	$        222,000.00
Direct labor	60000	$                   9.60	$        576,000.00
Variable Overhead	60000	$                   3.10	$        186,000.00

Standard DATA for		25000	units
	Quantity (SQ)	Rate (SR)	Standard Cost
	[A]	[B]	[A x B]
Direct Material	( 2.5 feet x 25000 units)=62500 feet	$                   3.30	$     206,250.00
Direct labor	( 2.3 hours x 25000 units)=57500 hours	$                10.00	$     575,000.00
Variable Overhead	( 2.3 hours x 25000 units)=57500 hours	$                   3.00	$     172,500.00

• Requirement 1

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                                3.30	-	$                       3.70	)	x	60000
	-24000
	Variance		$            24,000.00			Unfavourable-U
Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	62500	-	60000	)	x	$                           3.30
	8250
	Variance		$              8,250.00			Favourable-F

• Requirement 2

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                              10.00	-	$                       9.60	)	x	60000
	24000
	Variance		$            24,000.00			Favourable-F
Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	57500	-	60000	)	x	$                        10.00
	-25000
	Variance		$            25,000.00			Unfavourable-U

• Requirement 3A

Variable Overhead Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                                3.00	-	$                       3.10	)	x	60000
	-6000
	Variance		$              6,000.00			Unfavourable-U
Variable Overhead Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	57500	-	60000	)	x	$                           3.00
	-7500
	Variance		$              7,500.00			Unfavourable-U

• Requirement 3B

Fixed Overhead Production Budget Variance
(	Budgeted Fixed Overhead	-	Actual Fixed Overhead incurred	)
(	$                   275,000.00	-	$          270,000.00	)
	5000
	Variance		$              5,000.00			Favourable-F

Fixed Overhead Production Volume Variance
(	Standard Fixed Overhead or Fixed Overhead absorbed	-	Budgeted Fixed Overhead	)
(	$                   287,500.00	-	$          275,000.00	)
	12500
	Variance		$            12,500.00			Favourable-F