Question

ACC 2234 Hand-In Assignment 2 v3

QUESTION ONE:

Comprehensive Standard Cost Variances

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 $12,250 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 $3.50 per metre                                                       $14

Direct labour, 1.5 direct labour-hours at $12 per direct labour-hour                         18

Variable overhead, 1.5 direct labour-hours at $2 per direct labour-hour         3

Fixed overhead, 1.5 direct-labour hours at $6 per direct labour-hour             9

Standard cost per unit                                                                                         44

                                                                                           

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

a. The company manufactured 20,000 units of product during the year.

b. A total of 78,000 metres of material was purchased during the year at a cost of $3.75 per metre. All of this material was used to manufacture the 20,000 units. There were no beginning or ending inventories for the year.

c. The company worked 32,500 direct labour-hours during the year at a cost of $11.80 per hour.

d. 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)                               25,000

Budgeted fixed overhead costs (from the flexible budget)          $150,000

Actual fixed overhead costs                                                      $148,000

Actual variable overhead costs                                                  $68,250

Required:

Compute the direct materials price and quantity variances for the year.

Compute the direct labour rate and efficiency variances for the year.

For manufacturing overhead, compute the following:

The variable overhead spending and efficiency variances for the year.

The fixed overhead budget and volume variances for the year.

Total the variances you have computed, and compare the net amount with the $12,250 mentioned by the vice-president Do you think that everyone should be congratulated for a job well done? Explain.

QUESTION TWO:

Comprehensive Variance Analysis in a Hospital

Marc Goudreau, administrator of Clearwater Hospital, was puzzled by the prior month's reports. "Every month, it's anyone's guess whether the lab will show a profit or a loss. Perhaps the only answer is to increase our lab fees again."

"We can't," replied Rhoda Groves, the controller. "There are still a lot of complaints about the last increase, particularly from the insurance companies and government health units. They're now paying only about 80% of what we bill. I'm beginning to think the problem is on the cost side."

To determine if the Clearwater lab costs are in line with those of other hospital labs, Goudreau has asked you to evaluate the costs for the past month. Groves has provided you with the following information:

Two basic types of tests are performed in the lab—smears and blood tests. During the past month, 2,700 smears and 900 blood tests were performed in the lab.

Small glass plates are used in both types of tests. During the past month, the hospital purchased 16,000 plates at a cost of $38,400. This cost is net of a 4% purchase discount. A total of 2,000 of these plates were unused at the end of the month; no plates were on hand at the beginning the month.

During the past month, 1,800 hours of labour time were used in performing smears and blood tests. The cost of this labour time was $18,450.

The lab's variable overhead cost last month totalled $11,700.

Fixed overhead cost last month totalled $10,400.

Clearwater Hospital has never used standard costs. By searching industry literature, however, you have determined the following nationwide averages for hospital labs:

Plates: Three plates are required per lab test. These plates cost $2.50 each and are disposed of after the test is completed.

Labour: Each smear should require 0.3 hours to complete, and each blood test should require 0.6 hours to complete. The average cost of this lab time is $12 per hour.

Overhead: Overhead cost is based on direct labour-hours. The average rate of variable overhead is $6 per hour. The average rate of fixed overhead is $8 per hour. These rates are based on a denominator activity level of 1,250 hours per month.

Required:

Compute the materials price variance for the plates purchased last month, and compute a materials quantity variance for the plates used last month.

For labour cost in the lab:

Compute a labour rate variance and a labour efficiency variance.

In most hospitals, three-quarters of the workers in the lab are certified technicians and one-quarter are assistants. In an effort to reduce costs, Clearwater Hospital employs only one-half certified technicians and one-half assistants. Would you recommend that this policy be continued? Explain.

Compute the variable overhead spending and efficiency variances. Is there any relationship between the variable overhead efficiency variance and the labour efficiency variance? Explain.

Compute the fixed overhead budget and volume variances.

Answer 1

Ans 1 a. Direct Material Price variance = (Actual price - standard price)*Actual quantity

Direct material price variance = (3.75 - 3.50)*78000 = $19500 Adverse/Not favourable

Direct material quantity variance = (Standard Quantity - Actual quantity)*Standard price

Direct material quantity variance = (4*20000 - 78000)*3.5 = 7000 favourable

Ans 1 b. Direct labour rate variance = (Actual rate - Standard rate)*Actual hours

Direct labour rate variance = (11.80 - 12.00)*32500 = 6500 Favourable

Direct labour efficiency variance = (Actual hours - Standard hours)*Standard rate

Direct labour efficiency variance = (32500 - 30000)*12 = 30000 Adverse/Unfavourable

Ans 1 c. Variable overhead spending variance = (Actual manufacturing variable overheads expenditure) - (Actual hours*standard variable overhead rate per hour)

Variable overhead spending variance = $68250 - 32500*$2 = 3250 Adverse/Unfavourable

Variable overhead efficiency variance = (Actual hours - Standard hours)*Standard overhead rate

Variable overhead efficiency variance = (32500 - 30000)*2 = 5000 Adverse/Unfavourable

Ans 1 d. Fixed overhead budget variance = Budgeted fixed overhead - Actual Fixed overhead

Fixed overhead budget variance = $150000 - $148000 = $2000 Favourable

Fixed overhead volume variance = Absorbed fixed overheads - Budgeted fixed overheads

Fixed overhead volume variance = 32500*6 - 25000*6 = $45000 favourable

Now lets calculate the Net variance of all variances = 19500A + 7000F + 6500F + 30000A + 3250A + 5000A + 2000F + 45000F = 2750 Favourable

So this Favourable variance is low as compared to Vice president , So there is no question of congratulating everyone for well done.