Question

Larsen’s Creamery has a costing system with two direct cost categories: direct materials and direct manufacturing labor. Manufacturing overhead (both variable and fixed) is allocated to products on the basis of standard direct manufacturing labor-hours (DLH). At the beginning of 2020 Larsen adopted the following manufacturing cost standards. Input Cost per Output Unit Direct materials 3 lb. at $5 per lb. $15.00 Direct manufacturing labor 5 hours at $15 per hour $75.00 Manufacturing overhead Variable $6 per DLH $30.00 Fixed $8 per DLH $40.00 Standard manufacturing cost per output unit $160.00 The denominator level for total manufacturing overhead per month in 2020 is 40,000 direct manufacturing labor-hours. Larsen’s flexible budget for March 2020 was based on this denominator level. The records for March 2020 indicated the following: Direct materials purchased 25,000 lb. at $5.20 per lb. Direct materials used 23,100 lb. Direct manufacturing labor 40,100 hours at $14.60 per hour Actual fixed manufacturing overhead $350,000 Actual variable manufacturing overhead $250,000 Actual production 7,800 output units

Write a memo to managers about the issues you see and what actions you would recommend. Comment on how sustainability issues would influence your recommendation.

Answer 1

A schedule of total standard manufacturing cost for the 7,800 output units:

Direct material	$117,000 (7,800 * $15)
Direct Labor	$585,000 (7,800 ×$75)
Variable manufacturing overhead	$234,000 (7,800 ×$30)
Fixed manufacturing overhead	$312,000 (7,800 × $40)
Total Standard Manufacturing Costs	$1,248,000

Computation of the following varainces that indicating whether each is favorable (F) or unfavorable (U):

1. Direct materials price variance = Purchase quantity × ( actual price - standard price)

= 25,000 × ($5.20 - $5)

= 25,000 ×$0.20

= $5000 U

2. Direct materials efficiency variance = standard price × ( actual quantity - standard quantity given actual output)

= $5 × (23100 -(7800 × 3lbs per unit) )

=$5 × (23,100 - 23,400)

=$5 ×300 =$1500 F

3. Direct labor rate variance = actual hours × ( actual rate - standard rate)

= 40,100 hrs. × ($14.6ph - $15 ph)

=40100 hrs. × 0.40

=$16,040 F

4. Direct labor efficiency variance = standard rate × ( actual hours - standard hours given actual output)

=$14.60 ×( (40,100 - (7,800 × 5 hours))

=$14.60 × (40100 - 39000)

=$ 14.60 ×1,100

=$16,060 U

5. Total manufacturing overhead spending variance = total actual overhead - total budgeted overhead

= $800,000 - (7800 ×30+7800 ×40)

=$800,000 -( $234,000+$312,000)

=$800,000 - $546,000

=$254,000 U

6. Variable overhead efficiency variance = standard variable rate × (actual hours -standard hours)

=$30 × (23,100 - 23,400)

= $30 ×300

=$9000 F

7. Budgeted production = 40000/5 = 8000

Production volume variance = budgeted overhead rate × (actual units - budgeted units)

=$40 × (7,800 - 8,000)

=$40 × 200

=$8,000 U

Conclusion: As from the above calculations we come to know that Direct material price variance, direct labor efficiency variance, total manufacturing overhead spending variance have unfavorable situation and budgeted production also indicate unfavorble situation.