Question

The XYZ Company produces a single product: very large, hand stitched national flags for the Peoples’ Liberation Army.   Each year XYZ sells around 40,000 flags to the PLA.

In 20×2, XYZ had budgeted production of 40,000 flags. Each flag requires 2.8 square meters of cloth, the only direct material. The budgeted cost of the cloth is $1.20 per square meter. All emblems on the flag are stitched by hand, a time consuming process. Budgeted direct labor time for each flag is 4.2 hours. The budgeted cost of direct labor is $16/hour.

Manufacturing Overhead (MNFG OVHD) is allocated to the product based on machine hours. 0.8 machine hours are budgeted for the production of each flag. Variable MNFG OVHD is budgeted at $3.60 per machine hour. Fixed MNFG OVHD is budgeted at $35,200 for the year.

During 20×2, XYZ produced 38,500 flags. They purchased 116,000 square meters of cloth at a total cost of $141,520 and they used 109,500 square meters in production. XYZ used 160,500 direct labor hours at a total cost of $2,425,000 and 36,000 machine hours. The actual Variable MNFG OVHD costs incurred were $114,000 and the actual Fixed MNFG OVHD costs incurred were $36,120.

Required: Compute each of the following: (3 marks each)

Note, the direct material price variance is recognized at the time of purchase. Also, for each variance, you must indicate the AMOUNT and DIRECTION (F or U) of the variance.

1. The Direct Material Price Variance

2. The direct Material Efficiency Variance

3. The Direct Labor Price Variance

4. The Direct Labor Efficiency Variance

5. The Variable MNFG OVHD Spending Variance

6. The Variable MNFG OVHD Efficiency Variance  

7. The Fixed MNFG OVHD Spending Variance  

8. The Fixed MNFG OVHD production Volume Variance   

9. Present the general journal entry (in good form) needed to record the actual Fixed MNFG OVHD Costs incurred during 20×2.   

10. Present the General Journal Entry needed to record the allocation of Fixed MNFG OVHD to the product during 20×2.

11. Present the General Journal Entry needed at the end of 20×2 to close the Fixed MNFG OVHD accounts                                        

Answer 1

1             Direct material price variance=AQ*(SR-AR)

               If the answer is positive, variance is favourable. Otherwise, unfavourable

               Where                                               

               AQ=Actual material purchased=116000 Sq. mtr.                                             

               SR=Standard Rate=$1.20 per sq mtr                                                     

               AR=Actual rate=Total cost of material purchased/AQ

=141520/116000 = $ 1.22 per sq mtr                                                     

               Direct material price variance=116000*(1.20-1.22) = -2320

= $ 2320 Unfavourable                                                           

                                                                          

2             Direct material efficiency variance=SR*(SQ-AQ)                                               

               If the answer is positive, variance is favourable. Otherwise, unfavourable                                            

               Where                                               

               SR=Standard Rate=$1.20 per sq mtr                                                     

               SQ=Standard Quantity=Actual units produced*Material required per unit

=38500*2.8=107800 sq mtr                                              

               AQ=Actual quantity used=109500 sq mtr                                                           

               Direct material efficiency variance=1.20*(107800-109500) = -2040

= $ 2040 Unfavourable                                                

                                                                          

3             Direct labour price variance=ALH*(SR-AR)                                                          

               If the answer is positive, variance is favourable. Otherwise, unfavourable                                            

               Where                                               

               ALH=Actual labour hours=160500 Hours                                             

               SR=Standard labour rate per hour=$16                                                

AR=Actual labour rate per hour=Actual labour cost/ALH

=2425000/160500= $ 15.11                                                           

               Direct labour price variance=160500*(16-15.11) = $ 142845 Favourable                                              

                                                                          

4             Direct labour efficiency variance=SR*(SLH-ALH)                                               

               If the answer is positive, variance is favourable. Otherwise, unfavourable                                            

               Where                                               

               SR=Standard labour rate per hour=$16                                                

SLH=Standard labour hours=Actual units produced*Labour hours per unit

=38500*4.2 = 161700 hours                                               

               ALH=Actual labour hours=160500 Hours  

Direct labour efficiency variance=16*(161700-160500) =19200

= $ 19200 Favourable                                                           

                                                                          

5             Variable MNFG OVHD spending variance=AMH*(SR-AR)                                               

               If the answer is positive, variance is favourable. Otherwise, unfavourable                                            

               Where                                               

               AMH=Actual machine hours=36000 Hours                                                        

               SR=Standard variable overhead rate=$3.60 per machine hour                                                  

              AR=Actual variable overhead rate=Actual variable overhead/AMH

                                                                          =114000/36000

                                                                         = $3.17 per machine hour                                                       

Variable MNFG OVHD spending variance=36000*(3.60-3.17) = 15480

= $ 15480 Favourable                                                     

                                                                          

6             Variable MNFG OVHD efficiency variance=SR*(SMH-AMH)                                                         

               If the answer is positive, variance is favourable. Otherwise, unfavourable                                            

               Where                                               

               SR=Standard variable overhead rate=$3.60 per machine hour                                                  

               SMH = Standard machine hours = Actual units produced*Standard machine hours per unit

                                                                       =38500*0.8

                                                                       =30800 machine hours                                                

               AMH = Actual machine hours = 36000 Hours                                                    

               Variable MNFG OVHD efficiency variance=3.60*(30800-36000) = -18720 = $ 18720 Unfavourable

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