Question

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Aristotle Company planned to manufacture and sell 50,000 units of product, but instead manufactured and sold 49,000 units. Their operating income dropped significantly and top management would like to understand the cause of that. The company planned to purchase and use 500,000 pounds of direct material, but actually purchased and used 510,000 pounds of direct material. Production standards call for 7 hours per unit paid at $10.00 per hour. Aristotle actually used 352,800 direct labor hours. Variable overhead is allocated on the basis of direct labor cost. Budgeted and actual income and expenses are as follows:

	Budgeted	Actual
Units	50,000	49,000
Revenue	$10,000,000	$9,702,000
Variable Costs
Direct Materials	4,000,000	4,029,000
Direct Labor	3,500,000	3,351,600
Variable Overhead	1,750,000	1,740,000
Contribution Margin	$      750,000	$   581,400
Fixed Costs	350,000	300,000
Operating Income	$      400,000	$   281,400

Compute the following variances. Be sure to fill in both the amount of the variance as well as a label as to whether the variance is favorable (F) or unfavorable (U).

Sales price variance:

Dollars

F\U

2)

Sales volume variance:

Dollars

F\U

3)

Direct materials efficiency variance:

Dollars

F\U

4)

Direct materials price variance:

Dollars

F\U

5)

Direct labor efficiency variance:

Dollars

F\U

6)

Direct labor price variance:

Dollars

F\U

7)

Variable overhead efficiency variance:

Dollars

F\U

8)

Variable overhead spending variance:

Dollars

F\U

9)

Fixed cost spending variance:

Answer 1

1. Sales price variance=Actual total price of goods sold-standard total price of actual sales

=(49000*198-49000*200)

=$9702000-$9800000

= $98000 Unfavorable

2. Sales volume variance =Actual units sold- budgeted units sold*budgeted price per unit

= (49000-50000)*200

= 200000 Unfavorable

3.Direct material efficiency variance = standard price(Actual quantity used- Standard quantity allowed)

= $8(510000-500000)

=$80000 Unfavorable

4.Direct Material price variance =Actual quantity purchased(Actual price- standard price)

=510000(7.9-8)

= $51000 favorable

5.Direct labor efficiency variance = Standard rate(Actual hours-standard hours allowed)

=$10(352800-350000)

=$28000 Unfavorable

6.Direct labor price variance = Actual hours(Actual rate-standard rate)

=352800(9.5-10)

= $176400 favorable

7.Variable overhead efficiency variance=Standard rate(actual hours-standard hours)

= $1750000/3500000(352800-350000)   

=$0.5(2800)

=$1400 Unfavorable

8.Variable overhead spending variance = Actual hours* (Actual rates-standard rate)

=352800(0.52-0.5)

=$7056 Unfavorable

9.Fixed cost spending variance = actual fixed overhead- budgeted fixed overhead

=300000-350000

=$50000 favorable