Question

Direct Materials, Direct Labor, and Factory Overhead Cost Variance Analysis

Mackinaw Inc. processes a base chemical into plastic. Standard costs and actual costs for direct materials, direct labor, and factory overhead incurred for the manufacture of 4,400 units of product were as follows:

	Standard Costs		Actual Costs
Direct materials	5,700 lb. at $5.40		5,600 lb. at $5.20
Direct labor	1,100 hrs. at $17.60		1,130 hrs. at $18.00
Factory overhead	Rates per direct labor hr.,
	based on 100% of normal
	capacity of 1,150 direct
	labor hrs.:
		Variable cost, $3.10	$3,380 variable cost
		Fixed cost, $4.90	$5,635 fixed cost

Each unit requires 0.25 hour of direct labor.

Required:

a. Determine the direct materials price variance, direct materials quantity variance, and total direct materials cost variance. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number.

Price variance -1120	$ -1120	Favorable
Quantity variance -540	$-540	Favorable
Total direct materials cost variance -1660	$-1660	Favorable

b. Determine the direct labor rate variance, direct labor time variance, and total direct labor cost variance. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number.

Rate variance 452	$452	Unfavorable
Time variance 528	$528	Unfavorable
Total direct labor cost variance 980	$980	Unfavorable

c. Determine variable factory overhead controllable variance, the fixed factory overhead volume variance, and total factory overhead cost variance. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number.

Variable factory overhead controllable variance	$???	Favorable
Fixed factory overhead volume variance	$???	Unfavorable
Total factory overhead cost variance	$???	Unfavorable

Answer 1

Solution a:

Standard quantity of material for actual production = 5700 lb

Actual quantity of material = 5600 lb

Standard price of material = $5.40

Actual price of material = $5.20

Material price variance = (AP - SP) * AQ Purchased = ($5.20 - $5.40) * 5600 = -$1,120 F

Material quantity variance = (AQ - SQ) * SR = (5600 - 5700) * $5.40 = $540 F

Total direct materail cost variance = -$1,120 - $540 = -$1,660 F

Solution b:

Standard hours of direct labor = 1100 hours

Standard rate of direct labor = $17.60

Actual hours of direct labor = 1130 hours

Actual rate of direct labor =$18 per hour

Direct labor rate variance = (AR - SR) * AH = ($18 - $17.60) * 1130 = $452 U

Direct labor efficiency variance = (AH - SH) * SR = (1130 - 1100) * $17.60 = $528 U

Total direct labor cost variance = $452 + $528 = $980 U

Solution c:

Standard variable overhead cost = 1100 * $3.10 = $3,410

Actual varaiable overhead cost = $3,380

Variable overhead controllable variance = Actual variable overhead cost - Standard variable overhead cost

= $3,380 - $3,410 = -$30 F

Fixed overhead budget variance = Actual fixed overhead - Budgeted fixed overhead

= $5,635 - $1150*$4.90 = $0

Fixed overhead volume variance = Budgeted overhead - Fixed overhead applied

= $5,635 - (1100*$4.90) = $245 U

Total factory overhead cost variance = Varaible overhead controllable variance + Fixed overhead volume variance

= -$30 F + $245 U = $215 U