Question

JeziBee Enterprises produces T-shirts and sells to customers with fancy statement slogans. The standardized data of costs of direct material, direct labor, and overhead is given in Table 1. Table 1: Standard Data of Direct Material, Direct Labor and Overhead Standard Price Standard Quantity Standard Cost Direct materials $3.00 per yard 2 yards $6.00 Direct labor $14 per DLH 0.75 DLH 10.50 Variable overhead $3.20 per DLH 0.75 DLH 2.40 $18.90 An operations manager, Randy Rooch, was confronting with numerous unfavorable variances upon his analysis of the November results. In an order to manage the unfavorable variances, Randy requested his chief financial officer (CFO) to develop the summarized information about the unfavorable variances. CFO gave the following budgets of overhead for the month of November alongside the actual data of overhead. During the month of November, JeziBee Enterprise bought and utilized 82,000 yards of cloth. The actual cost of cloth per yard was $2.8 in the month of November. The total actual cost of labor was $457,375, or $12.50 per DLH. A total of 600,000 T-shirts were used for the yearly budgets. For the production, the company uses 45,000 DLH. During the month of November, a total of actual T-shirts produced were 42,500 while the budget was for 45,000 T-shirts.

Table 2: Overhead Data for November Annual Budget Per Shirt November - Actual Indirect material $720,000 $1.20 $52,900 Indirect labor 450,000 0.75 31,400 Equipment repair 180,000 0.30 13,700 Equipment power 90,000 0.15 6,500 Total Overhead $1,440,000 $2.40 $104,500 Required: a. Calculate the direct materials price and quantity variances for JeziBee for the month of November. And analyze the possible reasons for such variances with logical reasons. (2) b. Calculate the direct labor rate and efficiency variances for JeziBee for the month of November. And analyze the possible reasons for such variances with logical reasons. (2) c. Calculate the overhead spending and efficiency variances for JeziBee for the month of November. And analyze the possible reasons for such variances with logical reasons. (2) d. Which of these variances should Randy Rooch be held responsible for? Why? (1)

Answer 1

Particulars	Standard (42500 T-Shirts)	Actual (42500 T-Shirts)
Quantity (SQ/H)	Rate (SR)	Total	Quantity (AQ/H)	Rate (AR)	Total
Direct Material	85000	3	255000	82000	2.8	229600
Direct Labor	31875	14	446250	36590	12.5	457375
Overhead	31875	3.2	102000	36590	2.86	104500

A. Direct Material Price Variance

= AQ*(SR-AR)
=82000*(3-2.8)

=16400 (F)

Direct Material Quantity Variance

=SR*(SQ-AQ)
=3*(85000-82000)

=9000 (F)

Both the Direct Material Quantity and Price variance are favourable. Reason being quantity actual used is less than the standard quantity and actual purchase rate is also less than the standard rate. Hence favourable variances are obtained.

B. Direct Labour Rate Variance

= AH*(SR-AR)
=36590*(14-12.5)

=54885 (F)

Direct Labour Efficiency Variance

=SR*(SH-AH)
=14*(31875-36590)

=66010 (A)

The Direct Labour Price variance is favourable while efficiency variance is unfavourable. Reason being DLH actual used is more than the standard DLH results in unfavourable variance and actual wage rate is less than the standard rate which results in favourable variance.

C. Overhead Spending Variance

= AH*(SR-AR)
=36590*(3.2-2.86)

=12588 (F)

Direct Labour Efficiency Variance

=SR*(SH-AH)
=3.2*(31875-36590)

=15088 (A)

The Overhead Spending variance is favourable while efficiency variance is unfavourable. Reason being DLH actual used is more than the standard DLH results in unfavourable variance and actual overhead rate is less than the standard rate which results in favourable variance.

D. Randy Rooch should be responsible for only usage of Direct Labour Hours. Reason Being excess usage of labour hours had resulted in unfavourable labour and overhead efficiency variance as compared to the standard hours required.. If the same had been under standard hours, the variances could be favourable. Other variances are favourable and appreciated to the efforts of Randy Rooch for the management.

Please feel free to ask any clarity or any query on any point.