Question

Paynesville Corporation manufactures and sells a preservative used in food and drug manufacturing. The company carries no inventories. The master budget calls for the company to manufacture and sell 120,000 liters at a budgeted price of $225 per liter this year. The standard direct cost sheet for one liter of the preservative follows.

Direct materials	(2 pounds @ $14)	$	28
Direct labor	(0.5 hours @ $44)		22

Variable overhead is applied based on direct labor hours. The variable overhead rate is $120 per direct-labor hour. The fixed overhead rate (at the master budget level of activity) is $60 per unit. All non-manufacturing costs are fixed and are budgeted at $2.2 million for the coming year.

At the end of the year, the costs analyst reported that the sales activity variance for the year was $690,000 unfavorable.

The following is the actual income statement (in thousands of dollars) for the year.

Sales revenue	$	25,938
Less variable costs
Direct materials		2,788
Direct labor		2,510
Variable overhead		6,480
Total variable costs	$	11,778
Contribution margin	$	14,160
Less fixed costs
Fixed manufacturing overhead		1,150
Non-manufacturing costs		1,330
Total fixed costs	$	2,480
Operating profit	$	11,680

During the year, the company purchased 196,000 pounds of material and employed 50,400 hours of direct labor.


Required:
a. Compute the direct material price and efficiency variances.
b. Compute the direct labor price and efficiency variances.
c. Compute the variable overhead price and efficiency variances.

(For all requirements, enter your answers in whole dollars. Indicate the effect of each variance by selecting "F" for favorable, or "U" for unfavorable. If there is no effect, do not select either option.)

Paynesville Corporation manufactures and sells a preservative used in food and drug manufacturing. The company carries no inventories. The master budget calls for the company to manufacture and sell 120,000 liters at a budgeted price of $225 per liter this year. The standard direct cost sheet for one liter of the preservative follows.

Direct materials	(2 pounds @ $14)	$	28
Direct labor	(0.5 hours @ $44)		22

Variable overhead is applied based on direct labor hours. The variable overhead rate is $120 per direct-labor hour. The fixed overhead rate (at the master budget level of activity) is $60 per unit. All non-manufacturing costs are fixed and are budgeted at $2.2 million for the coming year.

At the end of the year, the costs analyst reported that the sales activity variance for the year was $690,000 unfavorable.

The following is the actual income statement (in thousands of dollars) for the year.

Sales revenue	$	25,938
Less variable costs
Direct materials		2,788
Direct labor		2,510
Variable overhead		6,480
Total variable costs	$	11,778
Contribution margin	$	14,160
Less fixed costs
Fixed manufacturing overhead		1,150
Non-manufacturing costs		1,330
Total fixed costs	$	2,480
Operating profit	$	11,680

During the year, the company purchased 196,000 pounds of material and employed 50,400 hours of direct labor.


Required:
a. Compute the direct material price and efficiency variances.
b. Compute the direct labor price and efficiency variances.
c. Compute the variable overhead price and efficiency variances.

(For all requirements, enter your answers in whole dollars. Indicate the effect of each variance by selecting "F" for favorable, or "U" for unfavorable. If there is no effect, do not select either option.)

Answer 1

	Cost card
	Particulars	Standard cost for actual production	Particulars	Actual cost
	Quantity & hour	Rate($/ltr & $/hr)	Amount	Quantity & hour	Rate($/ltr & $/hr)	Amount
	Direct Material	233867	14.00	$          3,274,133	Material purchased	196,000.00	14.22	$              2,788,000.00
		(116,933 ltr * 2 pound)			Material used	196,000.00	14.22	$              2,788,000.00
					Closing material	-		$                                   -
	Direct labour	58467	44.00	$          2,572,533	Direct labour	50,400.00	49.80	$              2,510,000.00
		(116,933 unit * 0.5 hr)
	Variable overhead	58467	120.00	$          7,016,000	Variable overhead	50,400.00	128.57	$              6,480,000.00
	Total Standard manufacturing cost	$        12,862,667
		Budgeted unit		120,000
		Actual unit		116,933
	Sales Activity variance = (Actual units sold - Budgeted units sold) x Budgeted price per unit
	690,000 = (Actual units sold - 120,000) x $225
	Actual units sold= [648,000-(118,000*$210)]/210 = 114,914 liter
	Computation of variances:
1	Material Price variance = (Standard rate - Actual rate) * Actual quantity purchase
	Material Price variance = ($14 - $14.22) X 196000 ltr   = $-44000 (Unfavourable)
2	Material efficiency variance = (Standard Quantity - Actual Quantity used) * Standard rate
	Material efficiency variance = (233867. ltr   - 196000 ltr ) X $14 = $530133 (Favourable)
3	Labor Rate variance = (Standard rate - Actual rate) * Actual hours
	Labor Rate variance = ($44/hr - $49.80/hr) X 50400 hr = $-292400 (Unfavourable)
4	Labor efficiency variance = (Standard Hours - Actual Hours) * Standard rate
	Labor efficiency variance = (58467. hr - 50400 hr) X $44/hr = $354933 (Favourable)
5	Variable Overhead rate variance = (Standard rate - Actual rate) * Actual hour used
	Variable Overhead rate variance = ($120/hr - $128.57/hr) X 50400 hr = $-432000 (Unfavourable)
6	Variable overhead efficiency variance = (Standard hour - Actual hour) * Standard rate
	Variable overhead efficiency variance = (58467. hr - 50400 hr) X $120/hr = $968000 (Favourable)

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