Question

Cordon Corporation set the following standard unit costs for its single product:

            Direct materials (25 lbs @ $4 per lb)                            $100 per unit

            Direct labor (6 hrs @ $8 per hr)                                         48 per unit

            Factory overhead – variable (6 hrs @ $5 per hr)          30 per unit

            Factory overhead – fixed (6 hrs @ $7 per hr)                42 per unit

            Total Standard cost                                                           $220 per unit

The predetermined overhead rate is based on a planned operating volume of 80% of the productive capacity of 60,000 units per quarter.  The following flexible budget information is available:

                                                                                    Operating levels

                                                            70%                            80%                            90%

Production in units                        42,000                       48,000                       54,000

Standard direct labor hours        252,000                     288,000                     324,000

Budgeted overhead

            Fixed MOH                           $2,016,000               $2,016,000               $2,016,000

            Variable  MOH                      1,260,000                 1,440,000                 1,620,000

During the current quarter, the company operated at 70% of capacity and produced 42,000 units of product: direct labor hours worked were 250,000. Units

Produced were assigned the following standard costs:

            Direct materials (1,050,000 lbs @ $4 per lb.)                        $4,200,000

            Direct labor (252,000 hrs @ $8 per hr)                                      2,016,000

            Factory overhead (252,000 hrs @ $12 per hr)                         3,024,000

            Total standard cost                                                                        $9,240,000

Actual costs incurred during the current quarter follow:

            Direct materials (1,000,000 @ $4.25 per lb)                          $4,250,000

            Direct labor (250,000 hrs @ $7.75 per hr)                                1,937,500

            Fixed factory overhead costs                                                        1,960,000

            Variable factory overhead costs                                                  1,200,000

            Total actual costs                                                                           $9,347,500

Required:

Prepare the level 3 variance analysis on Direct materials, and Direct labor. Include a description of what occurred.    

Answer 1

• Direct Material

Material Price Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Quantity
(	$                        4.00	-	$                       4.25	)	x	1000000
	-250000
	Variance		$          250,000.00			Unfavourable-U

Material Quantity Variance
(	Standard Quantity	-	Actual Quantity	)	x	Standard Rate
(	1050000	-	1000000	)	x	$                           4.00
	200000
	Variance		$          200,000.00			Favourable-F

Material Spending Variance
(	Standard Cost	-	Actual Cost	)
(	$       4,200,000.00	-	$      4,250,000.00	)
	-50000
	Variance		$            50,000.00			Unfavourable-U

• Direct Labor

Labor Rate Variance
(	Standard Rate	-	Actual Rate	)	x	Actual Labor Hours
(	$                        8.00	-	$                       7.75	)	x	250000
	62500
	Variance		$            62,500.00			Favourable-F

Labour Efficiency Variance
(	Standard Hours	-	Actual Hours	)	x	Standard Rate
(	252000	-	250000	)	x	$                           8.00
	16000
	Variance		$            16,000.00			Favourable-F

Labor Spending Variance
(	Standard Cost	-	Actual Cost	)
(	$       2,016,000.00	-	$      1,937,500.00	)
	78500
	Variance		$            78,500.00			Favourable-F