Question

. Variance Analysis

Sourpatch company is a manufacturer of a custom engraved hammers. For the year 2021, the weekly budget was as follows.

• Sales revenue $64,000: 2,000 hammers × price $32
• Variable costs:
  • Direct materials $10,000: 2,000 hammers ×1 lbs per hammer×price $5/lb
  • Direct labour $50,000: 2,000 hammers× 5 hour per hammer× rate $5/hour
  • 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:
  • Direct materials $13,200: 2,200 hammers ×1 lbs per hammer×price $6/lb
  • Direct labour $46,200: 2,200 hammers× 3 hour per hammer× rate $7/hour
  • no variable overhead
• Fixed costs: $8,000
• Profit: $8,000

Required:

1) Compute the following variances

a) Spending and Volume Variances of Materials

b) Spending and Volume Variances of Labour

c) Spending and Volume Variances of Fixed Overhead

c) Materials Quantity Variance

d) Materials Price Variance

e) Labour Efficiency Variance

f) Labour Rate Variance

2) SourPatch 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

	Cost card for 2200 units
	Particulars	Standard cost for actual production	Particulars	Actual cost
	Quantity & hour	Rate($/lbs & $/hr)	Amount	Quantity & hour	Rate($/lbs & $/hr)	Amount
	Direct Material	2200.00	5.00	$                11,000	Material purchased	2,200.00	6.00	$                    13,200.00
		(2200 units * 1 lbs)			Material used	2,200.00	6.00	$                    13,200.00
					Closing material	-		$                                   -
	Direct labour	11000.00	5.00	$                55,000	Direct labour	6,600.00	7.00	$                    46,200.00
		(2200 units * 5 hr)
	Fixed overhead			$                  3,000	Fixed overhead			$                      8,000.00
	Total Standard manufacturing overhead	$                69,000		$                    67,400.00
		Budgeted unit		2,000
		Actual unit		2,200
	Computation of variances:
1	Material Price variance = (Standard rate - Actual rate) * Actual quantity purchase
	Material Price variance = ( $5.00 - $6.00 ) * 2,200 lbs = -$2,200 (Unfavorable)
	Material efficiency variance = (Standard Quantity - Actual Quantity used) * Standard rate
	Material efficiency variance = (2200 lbs- 2200 lbs) * $5 = $0 (Not applicable)
	Total material Variance= = -$2,200 (unfavorable)
2	Labor Rate variance = (Standard rate - Actual rate) * Actual hours
	Labor Rate variance = ( $5/hr-$7/hr ) *6600 hr = -$13,200 (Unfavorable)
	Labor efficiency variance = (Standard Hours - Actual Hours) * Standard rate
	Labor efficiency variance = (11000 hr-6600 hr) *$5/hr = $22,000 (Favorable)
	Total labour Variance= $8,800 (Favourable)
3	Fixed Overhead Budget variance = (Actual Fixed overhead - Budgeted Fixed overhead
	Fixed Overhead Budget variance = ($8,000 - $3,000)= -$5000 (Unfavourable)
	Fixed overhead Volume variance = (Actual output - Budgeted output) * Budgeted Overhead rate
	Fixed overhead Volume variance = (2200 qty- 2000 qty) * ($3,000/2000 qty)= $300(Favorable)
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