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 $12,750 overall manufacturing cost variance is only 2% 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, 2.50 feet at $3.30 per foot	$	8.25
Direct labor, 2.3 direct labor-hours at $10 per direct labor-hour		23.00
Variable overhead, 2.3 direct labor-hours at $3.00 per direct labor-hour		6.90
Fixed overhead, 2.3 direct labor-hours at $5.00 per direct labor-hour		11.50
Standard cost per unit	$	49.65

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

1. The company manufactured 25,000 units of product during the year.
2. A total of 60,000 feet of material was purchased during the year at a cost of $3.70 per foot. All of this material was used to manufacture the 25,000 units. There were no beginning or ending inventories for the year.
3. The company worked 60,000 direct labor-hours during the year at a direct labor cost of $9.60 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)		55,000
Budgeted fixed overhead costs	$	275,000
Actual variable overhead costs incurred	$	186,000
Actual fixed overhead costs incurred	$	270,000

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).)

	Materials price variance    Materials quantity 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).)

	Labor rate variance Labor efficiency 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).)

	Rate variance Efficiency 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).)

	Budget variance    Volume variance

Answer 1

	Cost card
	Particulars	Standard cost for actual production	Particulars	Actual cost
	Quantity & hour	Rate($/feet & $/hr)	Amount	Quantity & hour	Rate($/feet & $/hr)	Amount
	Direct Material	62500.00	3.30	$              206,250	Material purchased	60,000.00	3.70	$                 222,000.00
		(25,000 unit * 2.5 ft)			Material used	60,000.00	3.70	$                 222,000.00
					Closing material	-		$                                   -
	Direct labour	57500.00	10.00	$              575,000	Direct labour	60,000.00	9.60	$                 576,000.00
		(25,000 unit * 2.3 hr)
	Variable overhead	57500.00	3.00	$              172,500	Variable overhead	60,000.00	3.10	$                 186,000.00
		(25,000 unit * 2.3 hr)
	Fixed overhead			$              275,000	Fixed overhead			$                 270,000.00
	Total Standard manufacturing cost	$          1,228,750
		Budgeted unit	(55,000/2.3 hr)	23,913
		Actual unit		25,000
	Computation of variances:
1	Material Price variance = (Standard rate - Actual rate) * Actual quantity purchase
	Material Price variance = ( $3.30 - $3.70 ) * 60,000 ft = -$24,000 (Unfavorable)
	Material efficiency variance = (Standard Quantity - Actual Quantity used) * Standard rate
	Material efficiency variance = (62,500 ft- 60,000 ft) * $3.30 = $8,250 (Favorable)
2	Labor Rate variance = (Standard rate - Actual rate) * Actual hours
	Labor Rate variance = ( $10.00/hr-$9.60/hr ) *60000 hr = $24,000 (Favorable)
	Labor efficiency variance = (Standard Hours - Actual Hours) * Standard rate
	Labor efficiency variance = (57500 hr-60000 hr) *$10.00/hr = -$25,000 (Unfavorable)
3	Variable Overhead rate variance = (Standard rate - Actual rate) * Actual hour used
	Variable Overhead rate variance = ( $3.00/hr-$3.10/hr ) *60000 hr = -$6,000 (Unfavorable)
	Variable overhead efficiency variance = (Standard hour - Actual hour) * Standard rate
	Variable overhead efficiency variance = (57,500 hr-60,000 hr) * $3.00/hr = -$7,500 (Unfavorable)
4	Fixed Overhead Budget variance = (Actual Fixed overhead - Budgeted Fixed overhead
	Fixed Overhead Budget variance = ($270,000 - $275,000)= $5000 (Favourable)
	Fixed overhead Volume variance = (Actual output - Budgeted output) * Budgeted Overhead rate
	Fixed overhead Volume variance = (25000 qty- 23913 qty) * ($275000/23,913 qty)= $12,500(Favorable)
	Total variance:	ekkarill92 Next > < Previous Related Solutions “Wonderful! Not only did our salespeople do a good job in meeting the sales budget this... “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 $18,300 overall manufacturing cost variance is only 1.2% of the $1,525,000 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... Wonderful! Not only did our salespeople do a good job in meeting the sales budget this... Wonderful! 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