Question

Company X manufactures a single product for which the standard cost of one unit is as follows:

	€
Direct material (3.0 kg at €2 per kg)	6.00
Direct labour (1.2 hours at €10 per hour)	12.00
Manufacturing overheads	7.00
	25.00

During January, the company produced 9,000 units and the actual costs were as follows:

Costs:	€
24,000 kg of material	56,500
10,950 hours of labour	110,700
Overheads	61,700
	228,900

Material price variance is                            [ Select ]                       ["€8,500 adverse", "€2,500 adverse", "€2,500 favourable", "€8,500 favourable"]      

Material usage variance is                            [ Select ]                       ["€2,500 favourable", "€6,000 adverse", "€6,000 favourable", "€2,500 adverse"]      

Overhead variance is                            [ Select ]                       ["€1,300 adverse", "There is no variance", "€1,300 favourable"]      

Which of the following might explain the above variances?

Material variance -                            [ Select ]                       ["Purchasing cheaper lower quality material", "Purchasing more expensive higher quality material"]      

Overhead variance

Answer 1

Material Price Variance = ( Actual price - Standard Price ) x Actual quantity

= ( ( 56,500 / 24,000 ) - 2 ) x 24,000

= ( 2.354167 - 2 ) x 24,000

= 0.354167 x 24,000

= $ 8,500 Adverse

Material usage variance = ( Actual quantity - Standard quantity ) x standard price

= ( 24,000 - ( 9,000 x 3 ) ) x 2

= ( 24,000 - 27,000 ) x 2

= -3,000 x 2

= $ 6,000 Favorable

Overhead variance = Actual Cost - Standard cost

= 61,700 - ( 9,000 x 7 )

= 61,700 - 63,000

= $ 1,300 Favorable

Material Price Variance is Adverse. Reason will be Purchasing more expensive higher quality Material.

Material quantity variance is favorable. Reason will be lower consumption of material in comparison to standard quantity.

Overhead variance is Favorable. Reaseon will be Less overhead actual cost incurred as compare to standard cost.