Question

Highland Company produces a lightweight backpack that is popular with college students. Standard variable costs relating to a single backpack are given below:

	Standard Quantity or Hours	Standard Price or Rate			Standard Cost
Direct materials	?	$	6.00	per yard	$	?
Direct labor	?		?			?
Variable manufacturing overhead	?	$	2	per direct labor-hour		?
Total standard cost per unit					$	?
Overhead is applied to production on the basis of direct labor-hours. During March, 760 backpacks were manufactured and sold. Selected information relating to the month’s production is given below: Materials Used Direct Labor Variable Manufacturing Overhead Total standard cost allowed* $ 18,240 $ 15,808 $ 2,432 Actual costs incurred $ 17,125 ? $ 4,345 Materials price variance ? Materials quantity variance $ 2,310 U Labor rate variance ? Labor efficiency variance ? Variable overhead rate variance ? Variable overhead efficiency variance ? *For the month's production. The following additional information is available for March’s production: Actual direct labor-hours 1,140 Difference between standard and actual cost per backpack produced during March $ 0.10 F Required: Hint: It may be helpful to complete a general model diagram for direct materials, direct labor, and variable manufacturing overhead before attempting to answer any of the requirements. 5. What is the standard direct labor rate per hour? 6. What was the labor rate variance for March? The labor efficiency variance? 7. What was the variable overhead rate variance for March? The variable overhead efficiency variance? 8. Prepare a standard cost card for one backpack.

Answer 1

First of all we will form a table for standard cost and actual cost as follows :-

Cost element	hours or quantity per unit	rate	standard cost for 1 unit	total standard cost
Direct material	4	6	24	18240
Direct labour	1.6	13 (20.8/1.6)	20.8	15808
Variable manufacturing overhead	1.6	2	3.2	2432
Total standard cost			48	36480

Note :- we have standard variable manufacturing overhead = 2432.

Standard rate per direct labour hour = 2

Therefore total direct labour hours = 2432/2=1216 hours

Thua standard direct labour hour per unit of backpack = 1216/760 = 1.6 labour hour

We have total standard direct material cost as $18240.

Rate per unit of material = 6

Therefore total direct material used = 18240/6=3040

Therefore for 1 unit material requirement = 3040/760= 4 yards.

We have total labour cost = $15808. Theefor per unit labour cost = 15808/760=20.8

We have standard cost and actual cost variance as 0.10 favourable. It means actual cost is less than standard by 0.10

Therefore, actual cost = $48-$0.10 = $47.90

We can also make similar table for actual cost also

Cost element	hours or quantity	rate	actual cost for 1 unit	total actual cost
Direct material			22.53	17125
Direct labour	1.50 (1140/760)	13.1 (19.65/1.50)	19.65	14934 (Bal fig)
Variable overhead	1.50	3.81 (5.72/1.5)	5.72	4345
			47.90	36404 (47.90x760)

5. Standard direct labour per hour = $13 per direct labour hour (refer table above).

6 . Labour rate variance = (standard rate - actual rate ) x actual hours

= (13-13.1)x1140

Therefore labour rate variance = 114 adverse.

Labour efficiency variance = (standard hours - actual hours)xstandard rate

[(1.6x760)-1140]x13

Therefore labour efficiency variance = 988 favourable

7 . Variable overhead rate variance = standard dete - actual rate ) xactual labour hours

= (2-3.81)x1140 = 2065 adverse

Variable overhead efficiency variance = standard hours - actual hours)xstandard rate

= [(1.6x760)-1140]x2 = 152 favourable

8 . Standard cost card for one back pack

Particular for standard cost	quantity or hours	rate	Amount
Direct material	4	6	24
Direct labour	1.6	13	20.8
Variable overhead	1.6	2	3.20
Total cost			$48