Question

Gold Corporation produces a single product and the standard labor cost of that product is 5 hours at a labor rate of $25 per hour. During the month of January, 50,000 hours of labor are incurred at a cost of $23 per hour to produce 9,850 units. Compute the labor price and quantity variance, as well as the total labor variance.

In producing that product, the standard material cost for 1 unit is 10 pounds of direct materials at $3.50 per pound. During January, 95,000 pounds of direct materials were used at a cost of $3.25 per pound to make the 9,850 units. Compute the materials price and quantity variance, as well as the total materials variance.

Gold Corporation allocates overhead using a predetermined rate.  The predetermined rate is calculated using direct labor hours as the cost driver. Budgeted overhead for the month of January was $150,000 and budgeted direct labor hours were 45,000.  Total overhead incurred during the month of January was $165,000.  Compute the overhead variance for Gold Corporation for January.

Now, compute the total variance for Gold Corporation for the month of January.  Explain some reasons behind why those variances may have occurred.

Answer 1

a)	Direct labor rate variance = (Actual rate-Standard rate)*Actual DLH = (23.00-25.00)*50000 =	$       1,00,000	Favorable
	Direct labor time variance = (Actual DLH-Standard DLH)*Standard rate = (50000-9850*5)*23.00 =	$          17,250	Unfavorable
	Total direct labor cost variance = DL price variance+DL time variance = 100000+18750 =	$          82,750	Unfavorable
	[ or 50000*23-9850*5*25)	$          81,250	Unfavorable
b)	Direct material price variance = (Actual price-Standard price)*Actual quantity purchased = (3.25-3.50)*95000 =	$          23,750	Favorable
	Direct material quantity variance = (Actual quantity used-Standard quantity)*Standard price = (95000-9850*10)*3.50 =	$          12,250	Favorable
	Total direct materials cost variance = DM price variance+DM quantity variance = 23750+12250 =	$          36,000	Favorable
	[or 95000*3.25 - 9850*10*3.50 =	$          36,000	Favorable
c)	Overhead variance = Actual overhead-Overhead assigned = 165000-9850*5*150000/45000 =	$                833	Unfavorable
	The overhead variance can be broken into overhead spending variance and overhead volume variance.
	Overhead spending variance = Actual overhead-Budgeted overhead = 165000-150000 =	$          15,000	Unfavorable
	Overhead volume variance = Budgeted overhead-Standard hours for actual production)*Predetermined OH rate = 150000-9850*5*150000/45000 =	$          14,167	Favorable
	Overhead cost variance = 15000-14167 =	$                833	Unfavorable
d)	TOTAL COST VARIANCE = Direct labor cost variance+Direct material cost variance+Overhead cost variance = 81250 [U]+36000 [F]+833[F] =	$          44,417	Favorable