Question

ABC Dress Shop produces high quality formal dresses. In July 2018 they produced 16,000 dresses. For the month of July the following standard and actual cost data are available. The normal monthly capacity of the company is 40,000 direct labor hours. All material purchased in July was used in July production.

	Standard per Dress	Actual
Direct materials	5.0 yards @ $8.50 per yard	$643,250 for 83,000 yards
Direct labor	2.0 hours @ $12.00 per hour	$425,000 for 34,000 hours
Overhead	hours @ $5.15 per hour (fixed $3.25; variable $1.90)	$125,000 fixed overhead $49,000 variable overhead

Overhead is applied on the basis of direct labor hours. At normal capacity, budgeted fixed overhead costs are $130,000 per month and budgeted variable overhead costs are $76,000 per month.

1) Calculate the direct materials price variance for July. Label the variance as favorable or unfavorable.

2) Calculate the direct materials quantity variance for July. Label the variance as favorable or unfavorable.

3) Calculate the direct labor rate variance for July. Label the variance as favorable or unfavorable.

4) Calculate the direct labor efficiency variance for July. Label the variance as favorable or unfavorable.

5) Calculate the variable overhead spending variance for July. Label the variance as favorable or unfavorable.

6) Calculate the variable overhead efficiency variance for July. Label the variance as favorable or unfavorable.

7) Calculate the fixed overhead spending variance for July. Label the variance as favorable or unfavorable.

8) Calculate the fixed overhead production volume variance for July. Label the variance as favorable or unfavorable.

9) Which of the variances should be investigated if management considers a variance of more than 5% from standard to be significant?

10) Provide a discussion of the tradeoffs that might exist between the direct material and direct labor variances.

Answer 1

1)

Direct Material Price Variance

=

(Standard Material Price-Actual Material Price)*Actual Material Quantity used

=

(8.50-7.75)*83000

=

$           62,250

favorable

Working:

Actual Material Price

=

Actual Material cost/ Actual Material quantity used

=

$ 6,43,250.00

/

83000

=

$               7.75

2)

Direct Material Quantity Variance

=

(Standard Quantity-Actual Qauntity)*Standard Material Price per unit

=

(80000-83000)*8.50

=

$           25,500

unfavorable

Working:

Standard Material quantity

=

Actual output*Standard Material per unit

=

16000*5.0

=

80000

3)

Direct Labor rate Variance

=

(Standard rate-Actual rate)*Actual Labor hours

=

(12.00-12.50)*34000

=

$           17,000

unfavorable

Working:

Actual Labor rate

=

Actual Labor cost/Actual Labor hours

=

$ 4,25,000.00

/

34000

=

$             12.50

4)

Direct Labor efficiency Variance

=

(Standard direct labor hours-Actual Labor hours)*Standard Labor rate

=

(32000-34000)*12.00

=

$           24,000

unfavorable

Working:

Standard Labor hours

=

Actual output*Standard Labor hour per unit

=

16000*2.0

=

32000