Question

Preble Company manufactures one product. Its variable manufacturing overhead is applied to production based on direct labor-hours and its standard cost card per unit is as follows:

Direct materials: 5 pounds at $9 per pound	$	45
Direct labor: 3 hours at $14 per hour		42
Variable overhead: 3 hours at $9 per hour		27
Total standard cost per unit	$	114

The planning budget for March was based on producing and selling 20,000 units. However, during March the company actually produced and sold 24,800 units and incurred the following costs:

Purchased 155,000 pounds of raw materials at a cost of $7.20 per pound. All of this material was used in production.

Direct laborers worked 65,000 hours at a rate of $15 per hour.

Total variable manufacturing overhead for the month was $612,300.

1. What raw materials cost would be included in the company’s planning budget for March? and in the Flexible budget also for March?

2. What is the materials price variance for March? and materials quantity variance for March?

3. 5. If Preble had purchased 180,000 pounds of materials at $7.20 per pound and used 155,000 pounds in production, what would be the materials price variance for March?

4. If Preble had purchased 180,000 pounds of materials at $7.20 per pound and used 155,000 pounds in production, what would be the materials quantity variance for March?

Thank you

Answer 1

Question 1 Calculation of raw material cost in Planning budget and Flexible budget:

	Planning budget	Planning budget
Production	20,000 units	24,800 units
Raw material per unit of production	5 pounds	5 pounds
Total raw material quantity	100,000 pounds	124,000 pounds
Standard/ estimanted cost per pound	$9	$9
Total raw material cost	$900,000	$1,116,000

Question 2 Calculation of Material price variance and Material Quantity variance:

Material Price Variance = Actual quantity purchased x (Standard price - Actual price)

= 155,000 pounds x ($9 - $7.20)

= $279,000 (Favorable)

Material Quantity Varaince = Actual price x (Stnd. quanity for actual prod. - Actual quantitty)

Standard quantity for production of 20,000 units = 20,000 x 5 pounds = 100,000 pounds

Standard quantity for production of 24,800 units = 24,800 x 5 pounds = 124,000 pounds.

Therefore, Material Quantity Variance = $9 x (124,000 pounds - 155,000 pounds)

= 279,000 (Unfavorable)

Question 3

Material Price Variance = Actual quantity purchased x (Standard price - Actual price)

= 180,000 pounds x ($9 - $7.20)

= $324,000 (Favorable)

Question 4

Material Quantity Varaince = Actual price x (Stnd. quanity for actual prod. - Actual quantitty)

Standard quantity for production of 20,000 units = 20,000 x 5 pounds = 100,000 pounds

Standard quantity for production of 24,800 units = 24,800 x 5 pounds = 124,000 pounds.

Therefore, Material Quantity Variance = $9 x (124,000 pounds - 155,000 pounds)

= 279,000 (Unfavorable)