Question

Koontz Company manufactures a number of products. The standards relating to one of these products are shown below, along with actual cost data for May.

	Standard Cost per Unit						Actual Cost per Unit
Direct materials:
Standard: 1.80 feet at $2.40 per foot	$	4.32
Actual: 1.75 feet at $2.60 per foot							$	4.55
Direct labor:
Standard: 0.90 hours at $15.00 per hour		13.50
Actual: 0.95 hours at $14.40 per hour								13.68
Variable overhead:
Standard: 0.90 hours at $7.00 per hour		6.30
Actual: 0.95 hours at $6.60 per hour								6.27
Total cost per unit	$	24.12					$	24.50
Excess of actual cost over standard cost per unit				$	0.38

The production superintendent was pleased when he saw this report and commented: “This $0.38 excess cost is well within the 5 percent limit management has set for acceptable variances. It's obvious that there's not much to worry about with this product."

Actual production for the month was 13,500 units. Variable overhead cost is assigned to products on the basis of direct labor-hours. There were no beginning or ending inventories of materials.

Required:

1. Compute the following variances for May:

a. Materials price and quantity variances.

b. Labor rate and efficiency variances.

c. Variable overhead rate and efficiency variances.

2. How much of the $0.38 excess unit cost is traceable to each of the variances computed in (1) above.

3. How much of the $0.38 excess unit cost is traceable to apparent inefficient use of labor time?

Answer 1

1.

1a	Material Price Variance	$4725 U
	Material quantity variance	$1620 F
1b	Labor rate Variance	$7695 F
	Labor Efficiency Variance	$10125 U
1c	Variable overhead rate variance	$5130 F
	Variable overhead efficiency variance	$4725 U

Workings

1a. Computation of Material price and quantity variance for may                                                         

Actual quantity of Material = 13500 unit x 1.75 feet = 23625 feet

Standard quantity of material = 13500 unit x 1.80 feet =24300 feet

Material price variance = (Standard price – Actual price) x Actual Quantity = (2.40-2.60) x 23625 =$4725U

Material quantity variance = (Standard quantity –Actual quantity) x Standard price =(24300-23625)x$2.40 = $1620F

1b.Computation of labor rate and efficiency variance

Actual hours = 0.95 hour x 13500units =12825 hours

Standard hours =0.90 hour x 13500 =12150 hours

Labor rate variance =(Standard rate – Actual rate) x Actual hours =(15-14.40)x12825hour =$7695 F

Labor Efficiency Variance = (Standard Hour- Actual hour)x Standard rate =(12150-12825)x$15 =$10125 U

1c. Computation of Variable overhead rate and efficiency variance

Actual hours = 0.95 hour x 13500units =12825 hours

Standard hours =0.90 hour x 13500 =12150 hours

Variable overhead rate variance =(Standard rate – Actual rate) x Actual hours =(7- 6.60)x 12825 hour = $5130F

Variable overhead efficiency variance = (Standard Hour- Actual hour)x Standard rate =(12150-12825)x$7 =$4725U

2. Statement showing how much of $0.38 excess unit cost traceable to each variance

Particulars	Amount$	Amount$
Materials:
Quantity Variance (1620F/13500units)	0.12 F
Price Variance (4725U/13500unit)	0.35 U	0.23 U
Labor :
Efficiency Variance (10125U/13500)	0.75 U
Rate Variance (7695F/13500)	0.57 F	0.18 U
Variable Overhead :
Efficiency Variance (4725U/13500)	0.35 U
Rate Variance (5130F/13500)	0.38 F	0.03 F
Excess of Actual over standard cost per unit ( Total)		0.38 U (0.23U+0.18U+0.03F)

3. Statement showing how much of $0.38 excess unit cost is traceable to inefficient use of labor time

Both the labor efficiency and variable overhead efficiency variances are affected by the inefficient use of the labor time.

Particulars	Amount $	Amount $
Excess of actual over standard cost per unit		0.38 U
Less: portion attributable to labor inefficiency:
Labor Efficiency Variance (10125U/13500)	0.75 U
Variable overhead Efficiency Variance (4725U/13500)	0.35 U	1.10 U
Portion due to other Variances		0.72 F

Note- the total variance in unit cost would have been favorable by $0.72 as opposed to unfavorable by $0.38