Question

Koontz Company manufactures a number of products. The standards relating to one of these products are shown below, along with actual cost data for May.

	Standard Cost per Unit			Actual Cost per Unit
Direct materials:
Standard: 1.80 feet at $2.60 per foot	$	4.68
Actual: 1.75 feet at $2.80 per foot				$	4.90
Direct labor:
Standard: 0.90 hours at $16.00 per hour		14.40
Actual: 0.95 hours at $15.40 per hour					14.63
Variable overhead:
Standard: 0.90 hours at $3.00 per hour		2.70
Actual: 0.95 hours at $2.60 per hour					2.47
Total cost per unit	$	21.78		$	22.00
Excess of actual cost over standard cost per unit				$	0.22

The production superintendent was pleased when he saw this report and commented: “This $0.22 excess cost is well within the 2 percent limit management has set for acceptable variances. It's obvious that there's not much to worry about with this product."

Actual production for the month was 10,000 units. Variable overhead cost is assigned to products on the basis of direct labor-hours. There were no beginning or ending inventories of materials.

Required:

1. Compute the following variances for May:

a. Materials price and quantity variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)

	Materials price variance None Materials quantity variance

b. Labor rate and efficiency variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)

	Labor rate variance Labor efficiency variance

c. Variable overhead rate and efficiency variances. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)

	Variable overhead rate variance Variable overhead efficiency variance

Answer 1

1.

Standard price of material = $ 2.6 per foot

Actual price of material = $ 2.8 per foot

Actual material quantity = 1.75 ft. x 10,000 units = 17,500

Material price variance = (Actual price – Standard price) x Actual quantity

                                          = ($2.8 - $ 2.6) x 17,500 = $ 0.2 x 17,500 = $ 3,500   U

Standard Quantity of material for actual production = 1.8 x 10,000 = 18,000

Materials quantity variance = (Actual Quantity – Standard Quantity) x Standard Price

                                                  = (17,500 – 18,000) x $ 2.6 = 500 x $ 2.6 = - $ 1,300    F

Material price variance	$3,500	U
Material quantity variance	$1,300	F

2.

Standard labor rate = $ 16 per hour

Actual labor rate = $ 15.40 per hour

Actual labor cost for 10,000 units = $ 14.63 x 10,000 = $ 146,300

Direct labor rate Variance = (Actual rate - Standard rate) × Actual hour

                                               = ($ 15.40 - $ 16) x 9,500 = - $ 0.6 x 9,500 = - $ 5,700    F

Standard hours for actual production = 0.9 x 10,000 = 9,000 hour

Standard hours for 2,000 units of actual production = 0.3 x 2,000 = 600 hour

Actual labor hours for actual production = 0.95 x 10,000 = 9,500 hours

Labor efficiency Variance = (Actual hours - Standard hours) x Standard rate

                                              = (9,500 – 9,000) x $ 16 = 500 x $ 16 = $ 8,000     U

Labor rate variance	$ 5,700	F
Labor efficiency variance	$ 8,000	U

3.

Actual overhead rate = $ 2.60 per hour

Standard overhead rate = $ 3 per hour

Variable overhead rate variance

= (Actual overhead rate - standard overhead rate) x Actual hours worked

= ($ 2.6 - $ 3) x 9, 500 = - $ 0.4 x 9,500 = - $ 3,800    F

Variable overhead efficiency variance

= (Actual hours - Standard hours) x Standard overhead rate

= (9,500 – 9,000) x $ 3 = 500 x $ 3 = $ 1,500 U

Variable overhead rate variance	$ 3,800	F
Variable overhead efficiency variance	$ 1,500	U