Question

For Russell, Inc., direct materials standards are 5 pounds at $15 per pound, direct labor standards are 2 hours at $25 per hour, and variable overhead is applied at a rate of $50 per hour. Russell budgeted to manufacture and sell 280,000 units for $550 per unit, but actually manufactured and sold 300,000 units for total revenues of $163,000,000, spending $25,000,000 for 1,600,000 pounds of direct materials and $14,000,000 for 550,000 hours of direct labor. Fixed overhead was budgeted at $40,000,000, but actually cost $45,000,000. Variable overhead actually cost $25,000,000. Calculate all nine variances and indicate whether they are favorable or unfavorable.

Answer 1

As the name of the variances has not been specified, I have calculated the relevant variances (10 in total).

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The variances are calculated as below:

Material Variances

Direct Material Price Variance = Actual Material*(Actual Rate - Standard Rate) = 1,600,000*(25,000,000/1,600,000 - 15) = $1,000,000 (Unfavorable)

Direct Material Quantity Variance = Standard Rate*(Actual Material - Standard Material for Actual Output) = 15*(1,600,000 - 5*300,000) = $1,500,000 (Unfavorable)

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Labor Variances

Direct Labor Rate Variance = Actual Labor Hours*(Actual Rate Per Hour - Standard Rate Per Hour) = 550,000*(14,000,000/550,000 - 25) = $250,000 (Unfavorable)

Direct Labor Efficiency Variance = Standard Rate Per Hour*(Actual Hours - Standard Hours for Actual Output) = 25*(550,000 - 2*300,000) = $1,250,000 (Favorable)

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Variable Overhead Variances

Variable Overhead Rate Variance = Actual Hours*(Actual Rate Per Hour - Standard Rate Per Hour) = 550,000*(25,000,000/550,000 - 50) = $2,500,000 (Favorable)

Variable Overhead Efficiency Variance = Standard Rate Per Hour*(Actual Hours - Standard Hours for Actual Output) = 50*(550,000 - 2*300,000) = $2,500,000 (Favorable)

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Fixed Overhead Variances

Fixed Overhead Expenditure Variance = Actual Overheads - Budgeted Overheads = 45,000,000 - 40,000,000 = $5,000,000 (Unfavorable)

Fixed Overhead Volume Variance = Budgeted Overheads - Absorbed Fixed Overheads = 40,000,000 - 40,000,000/280,000*300,000 = $2,857,143 (Favorable)

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Sales Variances

Sale Price Variance = Actual Sales*(Actual Selling Price - Budgeted Selling Price) = 300,000*(163,000,000/300,000 - 550) = $2,000,000 (Unfavorable)

Sales Volume Variance = Budgeted Selling Price*(Actual Sales - Budgeted Sales) = 550*(300,000 - 280,000) = $11,000,000 (Favorable)