Question

Utease Corporation has many production plants across the midwestern United States. A newly opened plant, the Bellingham plant, produces and sells one product. The plant is treated, for responsibility accounting purposes, as a profit center. The unit standard costs for a production unit, with overhead applied based on direct labor hours, are as follows.

Manufacturing costs (per unit based on expected activity of 24,000 units or 36,000 direct labor hours):

Direct materials (2 pounds at $20)	$	40.00
Direct labor (1.5 hours at $90)		135.00
Variable overhead (1.5 hours at $20)		30.00
Fixed overhead (1.5 hours at $30)		45.00
Standard cost per unit	$	250.00
Budgeted selling and administrative costs:
Variable	$	5		per unit
Fixed	$	1,800,000

Expected sales activity: 20,000 units at $425.00 per unit

Desired ending inventories: 10% of sales

Assume this is the first year of operations for the Bellingham plant. During the year, the company had the following activity.

  

Units produced		23,000
Units sold		21,500
Unit selling price	$	420
Direct labor hours worked		34,000
Direct labor costs	$	3,094,000
Direct materials purchased		50,000		pounds
Direct materials costs	$	1,000,000
Direct materials used		50,000		pounds
Actual fixed overhead	$	1,080,000
Actual variable overhead	$	620,000
Actual selling and administrative costs	$	2,000,000

  

In addition, all over- or underapplied overhead and all product cost variances are adjusted to cost of goods sold.

c. Find the direct labor variances. Indicate if they are favorable or unfavorable. (Indicate the effect of each variance by selecting Favorable, Unfavorable, and "None" for no effect.)

Labor Efficiency Variance _________ Favorable/Unfavorable?

Labor Rate Variance ___________ Favorable/Unfavorable?

d. Find the direct materials variances (materials price variance and quantity variance). (Enter your answers in dollars not in pounds. Indicate the effect of each variance by selecting Favorable, Unfavorable, and "None" for no effect (i.e., zero variance.)

Material quantity variance __________ Favorable/Unfavorable?

Material price variance ___________ Favorable/Unfavorable?

f. Calculate the actual plant operating profit for the year

Operating Profit __________

Answer 1

	Let's understand how Labour Efficiency Variance works
	For Labour Efficiency Variance, we need to know how much Actual Hours (AH) have we saved,
	or have Spent More as compared to Standard Hours (SH)
	If the Actual Hours happens to be lesser than the Standard Hours, then its Favourable Variance
	Why??, Because we have utilised a lesser amount of time, then Standard Time, so we have saved some time
	So now, since we have saved so much time, what is the benefit arising?
	It is the time saved by the Labour with respect to the price spent for each unit of time,
	For ex:
	To finish some kind of work, it takes 1 Hour of time in general( this is Standard Time)
	and let's say the Price for performing that work is $100
	Now, if A uses 45 min of time to finish the work, He is saving 15 min of time
	So A is saving 1/4 of the time
	so the cost would be How much?. (45/60)*$100= $75
	So there arises positive variance of $25
	Let's apply this to the Problem as stated
A)	LABOUR EFFICIENCY VARIANCE
	(SH-AH)*SR
	(SH*SR)-(AH*SR)
	SH= 36000
	AH= 34000
	SR= 90
	=(36000-34000)*90
	180000	(Favourable)
	Utease Corporation have saved 2000 Hours at the rate of $90
	Similarly, we calculate the Labour Rate Variance
	Here, we Ascertain the price saved per unit for the Hour actually worked
B)	LABOUR RATE VARIANCE
	AH*(SR-AR)
	(AH*SR- AH*AR)
	=(34000*90)-(3094000)
	-34000	(Unfavourable)
	Analysis, If we divide the Actual cost as stated in the problem with the actual Hours worked (3094000/34000),
	we arrive at the rate per unit, that is 91. so, $1 is paid in extra(91-90), for 34000 units of Hours worked, Hence, unfavourable
	Similar to the logic as applied to Labour variance, we shall apply for Material Variance
C)	MATERIAL QUANTITY VARIANCE
	(SQ-AQ)*SP
	SQ= (24000*2)= 48000
	AQ= 50000
	SP= $20
	=((24000*2)-50000)*20
	-40000	(Unfavourable)
	Analysis, we have used 50000 units, but the standard was 48000 units
	Hence 2000 units are utilized more @$20 per unit
D)	MATERIAL PRICE VARIANCE
	(SP-AP)*AQ
	SP= 20
	AP= (1000000/50000)= 20
	AQ= 23000
	=(20-(1000000/50000))*23000
	0	( Zero Variance)