In: Accounting
The following information is for the standard and actual costs for the Happy Corporation
Standard Costs:
Budgeted units of production - 16,000 (80% of capacity)
Standard labor hours per unit - 4
Standard labor rate - $28 per hour
Standard material per unit - 9 lbs
Standard material cost - $ 14 per pound
Standard variable overhead rate - $18 per labor hour
Budgeted fixed overhead - $650,000
Fixed overhead rate is based on budgeted labor hours at 80% capacity.
Actual Cost:
Actual production - 16,500 units
Actual material purchased and used - 130,000 pounds
Actual total material cost - $1,600,000
Actual labor - 65,000 hours
Actual total labor costs - $1,700,000
Actual variable overhead - $1,000,000
Actual fixed overhead - $640,000
Actual variable overhead - $1,000,000
Determine: (a) the quantity variance, price variance, and total direct materials cost variance; (b) the time variance, rate variance, and total direct labor cost variance (c) the controllable variable overhead variance and fixed overhead volume variance
a)
Actual material used (AQ) = 130000 pounds
Actual total material cost = $ 1600000
Actual price of material per pound (AP) = Actual total material cost/ Actual material used = $ 1600000/ 130000 pounds = $ 12.308 per pound
Standard material price (SP) = $ 14 per pound
Standard quantity material required for actual production (SQ)
= Actual production * Standard material required per unit
= 16500 units * 9 lbs/ unit = 148500 pounds
Quantity variance = (Actual quantity – Standard quantity) * Standard price
= (130000 – 148500) * 14 = $ 259000 Favorable.
(Actual quantity is less than standard quantity so variance will be favorable)
Price variance = (Actual price – Standard price) * Actual quantity
= (12.308 – 14) * 130000 = $ 219960 Favorable.
(Actual price is less than standard price so variance will be favorable)
Direct material cost variance
= (Actual price * Actual quantity) – (Standard price * Standard quantity)
= (12.308 * 130000) – (14 * 148500) = 1600040 – 2079000
= 478960 Favorable
(Actual cost is less than standard cost so variance will be favorable)
We can also find it by adding price and quantity variance. The difference of $40 is occurring in actual cost is due to the adjustments of decimal while calculating actual price.
b)
Actual labor hours (AH) = 65000 hours
Actual total labor costs = $ 1700000
Actual labor rate (AR) = Actual total labor costs/ Actual labor hours
= $ 1700000 / 65000 = $ 26.154 per hour
Standard labor hours (SH) = Actual production * Standard labor hour required per unit = 16500 units * 4hours/unit = 66000 hours
Standard labor rate = $ 28/hour
Time variance (Efficiency variance) = (AH – SH) * SP = (65000 – 66000) * 28
= $ 28000 Favorable
(Actual hours is less than standard hours so variance will be favorable)
Rate variance = (AR- SR) * AH = (26.154 – 28) * 65000
= $ 119990 Favorable
(Actual rate is less than standard rate so variance will be favorable)
Direct labor cost variance = (AH*AR) – (SH*SR)
= (65000 * 26.154) – (66000 * 28) = 1700010 – 1848000 = $ 147990
(Actual cost is less than standard cost so variance will be favorable)
We can also find it by adding rate and time variance. The difference of $10 is occurring in actual cost is due to the adjustments of decimal while calculating actual rate.
c)
*) Controllable variable overhead variances means sum of variable overhead spending and variable overhead efficiency variance. That is total variable overhead cost variance.
Standard variable overhead expenses for actual production
= Actual production * Standard hour required per unit * Standard rate
= 16500 units * 4hour/unit * $18/hour = $1188000
Controllable variable overhead variance (Variable overhead variance)
= Actual variable overhead expenses – Standard variable overhead expenses for actual production
= $1000000 - $1188000 = $ 188000 Favorable
(Actual expenses is less than standard expense so variance will be favorable)
Or
Actual rate of variable overhead (AR) = $ 1000000 /65000 hours = $ 15.385
Variable overhead spending variance = (AR-SR) * AH
= (15.385 – 18) * 65000 = $ 169975 Favorable
Variable overhead efficiency variance = (AH-SH) * SR
= (65000 – 66000) * 18 = $ 18000 favorable
Controllable variable overhead variance
= variable overhead spending + variable overhead efficiency variance
= $ 169975 Favorable + 18000 favorable = $ 187975 favorable
(The difference occurred due to adjustment of the decimal in the computation of actual rate)
*) Budgeted direct labor hours = Budgeted units of production * Standard labor hours per unit = 16000 units * 4hour /unit = 64000 hours
Budgeted fixed overhead = $ 650000
Budgeted fixed overhead rate = Budgeted fixed overhead / Budgeted direct labor hours
= $ 650000 /64000 = $ 10.156 per hour (Decimals rounded off)
Applied fixed overhead = Actual direct labor hours * Budgeted fixed overhead rate
= 65000 * $ 10.156 per hour = $ 660140
Fixed overhead volume variance= Applied fixed overhead – Budgeted fixed overhead
= $ 660140 - $ 650000 = $ 10140 Favorable
(Applied fixed overhead is greater than Budgeted fixed overhead so variance will be favorable)