Question

Downton Company manufactures two products, Abby and Mansion. The company prepares its master budget on the basis of standard costs. The following data are for January: Standards Abby Mansion Direct materials 3 ounces at $14.50 per ounce 4 ounces at $17.30 per ounce Direct labor 5 hours at $60.50 per hour 6 hours at $81.00 per hour Variable overhead (per direct labor-hour) $48.00 $53.50 Fixed overhead (per month) $368,068 $399,360 Expected activity (direct labor-hours) 6,680 7,800 Actual results Direct material (purchased & used) 5,200 ounces at $13.50 per ounce 4,600 ounces at $19.75 per ounce Direct labor 5,110 hours at $64.00 per hour 7.510 hours at $85.60 per hour Variable overhead $279,550 $399,510 Fixed overhead $337,950 $409,500 Units produced (actual) 1,100 units 1,200 units Compute the appropriate variances. Indicate which variances you would investigate and why. Abby Mansion Amount U/F Amount U/F Compute the Direct Materials Variances the direct materials price variance the direct materials quantity/efficiency variance the total variance for direct materials Compute the Direct Labor Variances the direct labor rate/price variance the direct labor efficiency variance the total variance for direct labor Compute the Variable Manufacturing Overhead Variances Price variance Efficiency variance Compute the fixed manufacturing overhead variances Price variance Production volume variance

Answer 1

Direct Material Price Variance = (SR – AR) * AQ

Abby :-

AQ = 5200 ounces

SR = $ 14.50

AR = $ 13.50

= (14.50 – 13.50) * 5200 = 5200 (F)

Mansion :-

AQ = 4600 ounces

SR = $ 17.30

AR = $ 19.75

= (17.30 – 19.75) * 4600 = 11270 (U)

Direct Material Quantity Variance= (SQ – AQ) * SR

Abby:-

SQ = Actual output * SQ per unit

    = 1100 * 3 = 3300

= (3300 – 5200) * 14.5 = 27550 (U)

Mansion:-

SQ = 1200 units * 4 = 4800

= (4800 – 4600) * 17.3 = 3460 (F)

Total Direct Material Variance:-

Abby = DM Rate Variance + DM Qty variance

     = 5200(F) + 27550(U) = 22350 (U)

Mansion = 11270(U) + 3460(F) = 7810 (U)

Direct Labour Rate Variance = (SR – AR) * A Hrs

Abby:-

SR = $ 60.50

AR = $ 64

A Hrs = 5110 hrs

= (60.50 – 64) * 5110 = 17885 (U)

Mansion:-

SR = $ 81

AR = $ 85.60

A Hrs = 7510 hrs

= (81 – 85.60) * 7510 = 34546 (U)

Direct Labour Efficiency Variance = (S hrs – A hrs) * SR

Abby:-

S hrs = Actual output * S. hr per unit

   = 1100 * 5 hr = 5500 hrs

(5500 – 5110) * 60.50 = 23595 (F)

Mansion:-

S hrs = 1200 units * 6 = 7200 hrs

(7200 – 7510) * 81 = 25110 (U)

Total DL Variance:-

Abby = DL rate variance + DL efficiency variance

    = 17885 (U) + 23595 (F) = 5710 (F)

Mansion = 34546 (U) + 25110 (U) = 59656 (U)

Variable O/H Price Variance = = (SR – AR) * A Hrs

Abby:-

SR = $ 48

AR = 279550/5110 = $ 54.71

A Hrs = 5110 hrs

= (48 – 54.71) * 5110 = 34270 (U)

Mansion:-

SR = $ 53.50

AR = 399510/7510 = $ 53.197

A Hrs = 7510 hrs

= (53.50 – 53.197) * 7510 = 2275 (F)

Variable O/H Efficiency Variance = (S Hrs – A Hrs) * SR

Abby:-

S hrs = Actual output * S. hr per unit

   = 1100 * 5 hr = 5500 hrs

(5500 – 5110) * 48 = 18720 (F)

Mansion:-

S hrs = 1200 units * 6 = 7200 hrs

(7200 – 7510) * 53.50 = 16585 (U)

Fixed O/H Volume Variance = Budgeted O/H – O/H Absorbed

Abby:-

Budgeted O/H = 368068

Budgeted Hrs = 6680 hrs

Recovery rate = 368068/6680 = 55.1

Std hrs = 5500

Absorbed O/H = Recovery rate * Std hrs

      = 55.1 * 5500 = 303050

Variance = 368068 – 303050 = 65018 (U)

Mansion:-

Budgeted O/H = 399360

Budgeted Hrs = 7800 hrs

Recovery rate = 399360/7800= 51.2

Std hrs = 7200

Absorbed O/H = Recovery rate * Std hrs

      = 51.2 * 7200 = 368640

Variance = 399360 – 368640 = 30720(U)

Fixed O/H Price Variance = Budgeted O/H – Actual O/H

Abby:-

= 368068 – 337950 = 30118 (F)

Mansion:-

399360 – 409500 = 10140 (U)