Question

Problem 8-26B Computing materials, labor, and fixed cost variances

Shaffer Corporation makes mouse pads for computer users. After the first year of operation, Peggy Shaffer, the president and chief executive officer, was eager to determine the efficiency of the company’s operation. In her analysis, she used the following standards provided by her assistant:

Units of planned production	400,000
Per-unit direct materials	1 square foot @ $1.00 per square feet
Per-unit direct labor	0.2 hour @ $20.00 per hour
Total estimated fixed overhead costs	$400,000

Shaffer purchased and used 460,000 square feet of material at an average cost of $0.96 per square foot. Labor usage amounted to 79,200 hours at an average of $19.60 per hour. Actual production amounted to 416,000 units. Actual fixed overhead costs amounted to $408,000. The company completed and sold all inventory for $3,400,000.

Required

a. Prepare a materials variance information table showing the standard price, the actual price, the standard quantity, and the actual quantity.

b. Calculate the materials price and usage variances and indicate whether they are favorable (F) or unfavorable (U).

c. Prepare a labor variance information table showing the standard price, the actual price, the standard hours, and the actual hours.

d. Calculate the labor price and usage variances and indicate whether they are favorable (F) or unfavorable (U).

e. Calculate the predetermined overhead rate, assuming that Shaffer uses the number of units as the allocation base.

f. Calculate the fixed cost spending and volume variances and indicate whether they are favorable (F) or unfavorable (U).

g. Determine the amount of gross margin Shaffer would report on the year-end income statement.

Answer 1

a). Material Price Information:
Standard Price = $1 per square foot
Actual Price = $0.96 per square foot
Standard Qty for actual production = 416000 sq feet
Actual Qty used = 460000 sq feet

b).Material price variance = (Std price - Actual Price)*Actual Qty =
(1-0.96)*460000 = 18400 F
Material usage variance = (Std qty -Actual Qty)*Std price
=(416000-460000)*1 = 44000 U

c). Labour variance information:
Standard price = $20 per hour
Actual Price = $19.60 per hour
Standard hours for actual production = 416000 *0.2 = 83200 hrs
Actula hours = 79200 hrs

d). Labour Price Variance = (std price -actual price)*Actual hrs
= (20-19.6)*79200 = 31680 F
Labour usage variance = (Std hrs-actual hrs)*Std rate
= (83200-79200)*20 = 80000 F

e)Predermined overhead rate = 400000/400000 = $1 per unit

f) Fixed overhead spending variance = Actual fixed overhead - Standard fixed overhead
= 408000-400000 = 8000 U
Fixed overhead volume variance = Overhead applied to produced goods - Budget Fixed overhead
= 416000*1 - 400000 = 16000 F

g) Gross Margin = Sales - Direct Material - Direct Labour - Overhead
= 3,400,000 - 441,600 - 1,552,320 - 408000 = 998080