Question

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

Answer 1

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)