Question

Given the following information:      

                                                                 Budget              Actual                    

Units produced                                        10,000              10,010       

Materials (kg)                                                 400                  405                    

Direct Labour (Hours)                              35,000            37,010                    

Material Costs                                         $8,000                      ?                     

Direct Labour Costs                            $385,000         $408,960                    

Variable Overhead Costs                    $350,000         $370,000

Fixed Overhead Costs                         $160,000         $136,358

Other Information

Overhead is Allocated on Direct Labour Hours

During the year, 500 kg of materials were purchased for $9,000

Beginning Inventory: none

Ending Inventory:     95kg

Required:

Calculate the following variances

1. Material Rate
2. Material Efficiency
3. Labour Price
4. Labour Efficiency
5. Variable Overhaed Rate
6. Variable Overhead Efficiency
7. Fixed Overhead Rate
8. Fixed Overhead Production Volume
1. What is the single likely cause of the significant variances?

Answer 1

A.	Material rate variance=Actual quantity consumed*(Standard rate of material-Actual rate of material)
	If the answer is positive, variance is favorable.Otherwise unfavorable.
	Actual quantity consumed=405 Kg.
	Standard rate of material=Budgeted material costs/Budgeted materials in Kg.=8000/400=$20 per Kg.
	Actual rate of material=Actual material purchase cost/Actual materials purchased in Kg.=9000/500=$ 18 per Kg.
	Material rate variance=405*(20-18)=$ 810 Favorable
B.	Material efficiency variance=Standard rate of material*(Standard quantity -Actual quantity consumed)
	If the answer is positive, variance is favorable.Otherwise unfavorable.
	Standard rate of material=Budgeted material costs/Budgeted materials in Kg.=8000/400=$20 per Kg.
	Standard quantity=Actual units produced*material required per unit
	Material required per unit=Budgeted materials in Kg./Budgeted units produced=400/10000=0.04 Kg per unit
	Standard quantity=10010*0.04=400.4 Kg.
	Actual quantity consumed=405 Kg.
	Material efficiency variance=20*(400.4 -405)=-92=$ 92 Unfavorable
	Actual material cost=Actual materials in Kg*Actual rate of material=405*18=$ 7290
C.	Labor price variance=Actual hours worked*(Standard rate of labor-Actual rate of labor)
	If the answer is positive, variance is favorable.Otherwise unfavorable.
	Actual hours worked=37010
	Standard rate of labor=Budgeted direct labor cost/Budgeted direct labor hours=385000/35000=$ 11 per hour
	Actual rate of labor=Actual direct labor cost/Actual direct labor hours=408960/37010=$ 11.05 per hour
	Direct labor rate variance=37010*(11-11.05)=-1850.5=$ 1850.5 Unfavorable
D.	Labor efficiency variance=Standard rate of labor*(Standard hours-Actual hours worked)
	If the answer is positive, variance is favorable.Otherwise unfavorable.
	Standard rate of labor=Budgeted direct labor cost/Budgeted direct labor hours=385000/35000=$ 11 per hour
	Standard hours=Actual units produced*standard hours required per unit
	Hours required per unit=Budgeted direct labor hours/Budgeted units produced=35000/10000=3.5 hours
	Standard hours=10010*3.5=35035 hours
	Actual hours worked=37010 hours
	Labor efficiency variance=11*(35035-37010)=-21725=$ 21725 unfavorable