Question

Clarissa McWhirter, vice-president of Cyprus Company, was pleased to see a small variance on the income statement after the trouble the company had been having in controlling manufacturing costs. She noted that the $29,590 overall manufacturing variance reported last period was well below the 3% limit that had been set for variances. The company produces and sells a single product. The standard cost card for the product follows:

Standard Cost Card—Per Unit
Direct materials, 4 metres at $3.30 per metre	$	13.20
Direct labour, 1.1 direct labour-hours at $13.5 per direct labour-hour		14.85
Variable overhead, 1.1 direct labour-hours at $2.3 per direct labour-hour		2.53
Fixed overhead, 1.1 direct labour-hours at $4 per direct labour-hour		4.40
Standard cost per unit	$	34.98

The following additional information is available for the year just completed:

1. The company manufactured 28,000 units of product during the year.
2. A total of 111,100 metres of material was purchased during the year at a cost of $3.40 per metre. All of this material was used to manufacture the 28,000 units. There were no beginning or ending inventories for the year.
3. The company worked 32,600 direct labour-hours during the year at a cost of $13.20 per hour.
4. Overhead cost is applied to products on the basis of standard direct labour-hours. Data relating to manufacturing overhead costs follow:

  

Denominator activity level (direct labour-hours)		31,550
Budgeted fixed overhead costs (from the flexible budget)	$	126,200
Actual fixed overhead costs	$	124,900
Actual variable overhead costs	$	76,070

Required:

1. Compute the direct materials price and quantity variances for the year. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

2. Compute the direct labour rate and efficiency variances for the year. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

3. For manufacturing overhead, compute the following:

a. The variable overhead spending and efficiency variances for the year. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

b. The fixed overhead budget and volume variances for the year. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

4. Compute the total variance. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Answer 1

1. A) Material Price variance (MPV)

MPV = Actual material Quantity (Actual Price - Budgeted Price)

= 111100 x (3.4 -3.3) = 11,110 U

1. b) Material quantity variance (MQV)

MQV = Budgeted price (Actual quantity- Standard Quantity)

= 3.3 x (111100 -112000) = 2970 F

2. A) Labor rate variance (LRV)

LRV = Actual labor hour (Actual rate - Std rate)

= 32600 x (13.2 -13.50) = 9780 F

2. B) Labor efficiency variance (LEV)

LEV = Std rate x (Actual hours - Std hours)

= 13.50 x (32600 - 28000*1.1) =24300 U

3. A) Variable Overhead Spending Variance (VOSV):

VOSV= Actual Variable Overheads Expenditure

Less

Standard Variable Overhead Rate per hour  x  Actual hours

= 79070 - (32600 x $2.3) = 4090 U

3. B) Variable Overhead Efficiency Variance (VOEV):

Standard Variable Overhead Rate per hour  x  VOEV = Standard hours

                         Less

Standard Variable Overhead Rate per hour  x  Actual hours

= (30800 x 2.3) - (32600 *2.3) = 4140 F

4) Total variance

11110 U -2970 F -9780F +24300 U +4090 U -4140 F

=$22,610