Question

“Wonderful! Not only did our salespeople do a good job in meeting the sales budget this year, but our production people did a good job in controlling costs as well,” said Kim Clark, president of Martell Company. “Our $10,450 overall manufacturing cost variance is only 3% of the $1,536,000 standard cost of products made during the year. That’s well within the 3% parameter set by management for acceptable variances. It looks like everyone will be in line for a bonus this year.”

   

The company produces and sells a single product. The standard cost card for the product follows:

Standard Cost Card—per Unit
Direct materials, 5.00 feet at $4.50 per foot	$	22.50
Direct labor, 1.5 direct labor-hours at $8 per direct labor-hour		12.00
Variable overhead, 1.5 direct labor-hours at $2.30 per direct labor-hour		3.45
Fixed overhead, 1.5 direct labor-hours at $4.00 per direct labor-hour		6.00
Standard cost per unit	$	43.95

The following additional information is available for the year just completed:

1. The company manufactured 15,000 units of product during the year.
2. A total of 73,000 feet of material was purchased during the year at a cost of $4.65 per foot. All of this material was used to manufacture the 15,000 units. There were no beginning or ending inventories for the year.
3. The company worked 24,500 direct labor-hours during the year at a direct labor cost of $7.90 per hour.
4. Overhead is applied to products on the basis of standard direct labor-hours. Data relating to manufacturing overhead costs follow:

Denominator activity level (direct labor-hours)		20,000
Budgeted fixed overhead costs	$	80,000
Actual variable overhead costs incurred	$	58,800
Actual fixed overhead costs incurred	$	77,900

Required:

1. Compute the materials price and quantity variances for the year. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)

2. Compute the labor rate and efficiency variances for the year. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)

3. For manufacturing overhead compute:

a. The variable overhead rate and efficiency variances for the year. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)

b. The fixed overhead budget and volume variances for the year. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

  

Answer 1

	Standard:
	Direct Material (Quantity per unit required for output) (feet)	5.00
	Direct Material (Cost per unit)	4.50
	Direct Labour (Hours per unit)	1.50
	Direct Labour (Cost per hour)	8.00
	Variable Overhead (Cost per hour)	2.30
	Total Fixed Overheads	80,000
	Fixed Overheads cost per hour absorption rate	4.50
	Actual:
	Units Manufactured	15,000
	Total Direct Material Used (feet)	73,000
	Cost of purchase of Direct Material (per unit)	4.65
	Total Labour Hours Worked	24,500
	Cost of Labour per hour	7.90
	Total Variable cost incurred	58,800
	Total Fixed Overheads incurred	77,900
	Calculation of variances:
	1. Material Price Variance = (Standard Price per unit - Actual Price per unit) * Actual Quantity Used
a	Standard Price per unit	4.50
b	Actual Price per unit	4.65
c	Actual Quantity Used	73,000
d	Material Price Variance	10,950	U
	[(a) - (b)] * (c)
	2. Material Quantity Variance = (Standard Quantity - Actual Quantity) * Standard Price Per Unit
a	Standard quantity required	75,000
b	Actual quantity used	73,000
c	Standard Price per unit	4.50
d	Material Quantity Variance	9,000	F
	[(a) - (b)] * (c)
	3. Labour Rate Variance = (Standard rate per hour - Actual rate per hour) * Actual labour hours used
a	Standard Rate per hour	8.00
b	Actual Rate per hour	7.90
c	Actual Hours Worked	24,500
d	Labour Rate Variance	2,450	F
	[(a) - (b)] * (c)
	4. Labour Efficiency Variance = (Standard hours for actual output - Actual hours worked) * Standard rate per hour
a	Standard hours for actual output	22,500
b	Actual Hours Worked	24,500
c	Standard Price per hour	8.00
d	Labour Efficiency Variance	16,000	U
	[(a) - (b)] * (c)
	5. Variable Overhead Rate Variance = (Standard rate per hour - Actual rate per hour) * Actual hours worked
a	Standard Price per hour	2.30
b	Actual Price per hour	2.40
c	Actual Hours Worked	24,500
d	Variable Overhead Rate Variance	2,450	U
	[(a) - (b)] * (c)
	6. Variable Overhead Efficiency Variance = (Standard hours for actual output - Actual hours worked) * Standard rate per hour
a	Standard hours for actual output	22,500
b	Actual Hours Worked	24,500
c	Standard Price per hour	2.30
d	Variable Overhead Efficiency Variance	4,600	U
	[(a) - (b)] * (c)
	7. Fixed Overhead Budget Variance = (Actual Fixed Overhead - Budgeted Fixed Overhead)
a	Actual Fixed Overhead	77,900
b	Budgeted Fixed Overhead	80,000
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