Question

Need assistance with part, C, D, then subset A, B.

PART EIGHT

(Variances)

            For the month of December of Year 2, MI’s budget for December projected Budgeted Production as shown below.  Then, during December of Year 2 operations, MI actually produced andsold as shown below. [Summary: Budget and Actual were different-big surprise there.]

                                    Actual Production &                                  Budgeted

                                    Sales                                                             Production

            Dolls:             30,570 dolls                                                 31,678 dolls

            Replicas:       2,105replicas                                             2,595 replicas

                        Total: 32,675 units

            The budgetedsales prices were as follows:

            Dolls:             $5.00/doll

            Replicas:       $5.25/replica

REQUIRED:

            

C.        Direct Labor Variances:  Using the three-part computation formulasshown in the textbookand the information above and below, compute the labor rate and efficiency variances for both types of figurines (dolls and replicas) using the following information:

                                    Actual Labor                        Actual Direct

                                    Costs Incurred                    Labor Hours

            Dolls:             $71,350.00                           7,150 hrs.

            Replicas        $ 6,425.00                                 650hrs.

                        Total Actual Hours             7,800hrs.

[Reminder:Remember from earlier in the problem, budgeted labor is 4 dolls per direct labor hourand budgeted labor is 3.6 dolls per direct labor hour.]

                        Note:  Compute the total variance between the budget and the actual. Then compute the two component parts of that total variance.  

                        Reminder:  The sum of the two component parts must equal the total variance.  Remember that your goal is to explain the total variance between budget and actual so sum of the component parts must equal total variance.

            D.        Overhead Variance.  Assume that MI continued to use the $2.13/actual direct labor hour as the overhead allocation rate.  During this month, actual overhead was as follows:

                        A.         Variable Overhead Costs:             $17,002.00

                        B.        Fixed Overhead Costs:                   $  3,850.00

                                                Total Overhead Costs:      $20,852.00

Required:Using the three-part variable overhead variance formulain the textbook and the information above, compute the spending variance and the efficiency variance for the Variable Overhead Costs only. [You can ignore the fixed costs for this portion–assume that they were right on budget.]

Required:  How would these variances be interpreted?  What might have cause them

______________________________________________________________________

Suggestions:  Like many accounting problems, half the battle is figuring out how to set up the solution.  So here are a couple of suggestions.

A.         At the outset, set up a chart with all of the relevant date relating to this problem in Excel so that you can “copy and paste” data easily.  Here’s a suggested format:

Actual                                                                        Budgeted

Volume:         ___________ Dolls                                    Volume:         ___________ Dolls

Volume:         ___________ Replicas                 Volume:         ___________ Replicas

Volume:         ___________ Total                                    Volume:         ___________ Total

Sales:                        $__________ Dolls                                    Sales:                        $__________ Dolls

Sales:                        $__________ Replicas                 Sales:                        $___________ Replicas

Sales:                        $__________ Total                                    Sales:                        $__________ Total

Sales Price:  $__________ Dolls                                   Sales Price:  $_________Dolls

Sales Price:  $__________ Replicas                Sales Price:  $_________Replicas

Contribution Margin:           $___________/Doll

Contribution Margin:           $____________/Replica

B         Remember to use the applicable “three part formula” for the computations.  In general, that formula is something like this:

AC X AV =                                                                                          SC X SV =

$__________                                                                                  $_____________

                                                            AC X SV =

                                                            $_____________

The arithmetical difference between (AC X AV) – (SC X SV) is the overall variance.

The arithmetical differences between each of the outer computations minus the middle computation are the component parts of the variance.

Reminder:  This is a generic version of the formula.  In your solutions, you will substitute in the terms applicable for sales, materials, labor and overhead.

Answer 1

		Budgeted	Actual
	Production
	Dolls	30,570	31,678
	Replica	2,105	2,595
		32,675.00	34,273.00
	Sales Price
	Dolls	$          5.00
	Replica	$          5.25
		Budgeted	Actual	Budgeted	Actual	Budgeted	Actual
C	DIRECT LABOR VARIANCE	HRS	HRS	RATE	RATE	TOTAL	TOTAL
	Dolls	7,642.50	7,150.00	9.98	9.98	$ 76,264.67	$ 71,350.00
	Replica	584.72	650.00	9.88	9.88	$   5,779.75	$   6,425.00
		8,227.22	7,800.00			$ 82,044.42	$ 77,775.00
	Budgeted calculated as given below, Budgeted rate taken same as Actual
			Budget
	Standard Per Doll Hours	0.25	30570.00	7642.50
	Standard Per Replica Hours	0.28	2105.00	584.72

Labour Rate Variance
=AH(SR-AR) Dolls	Replica
=7150(9.98-9.98)	=650(9.88-9.88)
=0	=0
Labour Efficiency Variance
=SR(SH-AH)
=9.98(7642.5-7150.00)	=9.88*(584.72-650)
=4915.15 (F)	=644.97 (U)
Labour Cost Variance
=(SHxSR)-(AHxAR)
=(7642.50*9.98)-(7150*9.98)	=(584.72*9.88)-(650*9.88)
=4915.15 (F)	=644.97 (U)
Verification
LCV=LRV+LEV
=4915.15(F)=0)+4915.15(F)	=644.97(U)=0+644.97(U)

F=FAVOURABLE, U=UNFAVOURABLE

D	DIRECT LABOR VARIANCE		Actual	Budgeted	Actual	Budgeted	Actual
			HRS	RATE	RATE	TOTAL	TOTAL
	Total Budgeted Qty	32,675.00	7,800.00	2.13	2.18	$ 69,597.75	$ 17,002.00		16,614.00
	Total Actual Qty	34,273.00							-
			7,800.00			$ 69,597.75	$ 17,002.00		16,614.00

Variable OH Rate Variance

=AQ*(SR-AR)

=34273(2.13-2.18)

=1713.65 (U)

Variable OH Efficiency Variance

=SR*(SQ-AQ)

=2.13*(32675-34273)

=3403.74 (U)

Variable OH Cost Variance

=(SQxSR)-(AQxAR)

=(32675x2.13)-(34273x2.18)

=5117.39 (U)

Verification

VOHCV=VOHRV+VOHEV

=5117.39(U)=1713.65(U)+3403.74(U)

These variances are unfavourable mainly due to rate hike. Further, there is decrease in efficiency as production is less than what is expected from standards set by the Company.

Part- A & B is already covered in above C & D as per the requirements of the questions.