Question

Nail_It company is a manufacture of a custom engraved hammer. For the year 2021, the weekly budget was as follows.

• Sales revenue $64,000: 2,000 hammers × price $32

• Variable costs: o Direct materials $10,000: 2,000 hammers × 1 lbs per hammer × price $5/lb o Direct labor $50,000: 2,000 hammers × 5 hour per hammer ×rate $5/hour o no variable overhead

• Fixed costs: $3,000 • Profit: $1,000

The actual performance of the week was as follows.

• Sales revenue $70,400: 2,200 hammers × price $32

• Variable costs: o Direct materials $13,200: 2,200 hammers × 1 lbs per hammer × price $6/lb o Direct labor $46,200: 2,200 hammers × 3 hour per hammer ×rate $7/hour o no variable overhead

• Fixed costs: $8,000 • Profit: $8,000

Required:

1) Compute the following variances

a) Sales Volume Variance b) Sales Price Variance c) Input Quantity Variance for Materials d) Input Price Variance for Materials e) Input Quantity Variance for Labor f) Input Price Variance for Labor

2) Nail_It company hired an experienced engineer and asked her to re-organize the production process. How could hiring an experienced engineer and their new production process explain the variances? Please comment on individual components of variances, their relations to other variances, and overall impact on profitability.

Answer 1

1.

a) Sales volume variance = (Actual units sold - Budgeted units sold) x Budgeted price per unit

= (2200 - 2000) x $32 = $6,400 favourable

b) Sales price variance = (Actual price – Budgeted price) × Actual number of units sold

= (32 - 32) x 2000 = $0 No variance

c) Material quantity variance = (Actual quantity - Standard quantity) x Standard price

= (2000 - 2200) x 5 = $1000 favourable

d) Material price variance = (Actual price – Budgeted price) × Actual Quantity

= (6 - 5) x 2200 = $2200 unfavourable

e) Labour efficiency variance = (Actual hours - Standard hours) x Standard rate

= (6600 - 11000) x 5 = $4400 favourable

f) Labour rate variance = (Actual rate – Budgeted rate) × Actual hours

= (7 - 5) x 6600 = $13200 unfavourable

2. An experienced engineer can re-organise the production process to make changes in the material quantity and labour efficiency variances. According to the calculations, both of these variances are favourable for the company. Now, company has to think about increasing the standards according to the performance.

As per the standards provided, labors and production processes are running smoothly and they are efficient to provide more than the standard. The price variance is what the company has to take into consideration now. Labour rate variance, as well as Material price variance, is unfavorable for the company.

Sales volume variance - Sales Volume Variance is the measure of the change in sales revenue as a result of the difference between actual and budgeted sales quantity.

Sales price variance - Sales Price Variance is the measure of the change in sales revenue as a result of the variance between actual and standard selling price.

Material quantity variance - Direct Material Usage Variance is the measure of the difference between the actual quantity of material utilized during a period and the standard consumption of material for the level of output achieved

Material price variance - Direct Material Price Variance is the difference between the actual cost of direct material and the standard cost of the quantity purchased or consumed

Labor efficiency variance - Direct Labor Efficiency Variance is the measure of the difference between the standard cost of the actual number of direct labor hours utilized during a period and the standard hours of direct labor for the level of output achieved.

Labour rate variance - Direct Labor Rate Variance is the measure of the difference between the actual cost of direct labor and the standard cost of direct labor utilized during a period