Question

You have recently accepted a position with Vitex, Inc., the manufacturer of a popular consumer product. During your first week on the job, the vice president has been favorably impressed with your work. She has been so impressed, in fact, that yesterday she called you into her office and asked you to attend the executive committee meeting this morning for the purpose of leading a discussion on the variances reported for last period. Anxious to favorably impress the executive committee, you took the variances and supporting data home last night to study.

    

On your way to work this morning, the papers were laying on the seat of your new, red convertible. As you were crossing a bridge on the highway, a sudden gust of wind caught the papers and blew them over the edge of the bridge and into the stream below. You managed to retrieve only one page, which contains the following information:

Standard Cost Card
Direct materials, 2.40 pounds at $17.10 per pound	$	41.04
Direct labor, 1.00 direct labor-hours at $15.50 per direct labor-hour	$	15.50
Variable manufacturing overhead, 1.00 direct labor-hours at $9.30 per direct labor-hour	$	9.30

	Total Standard Cost*		Variances Reported
			Price or Rate			Quantity or Efficiency
Direct materials	$	779,760	$	13,804	F	$	34,200	U
Direct labor	$	294,500	$	4,000	U	$	15,500	U
Variable manufacturing overhead	$	176,700	$	4,700	F	$	? †	U

^*Applied to Work in Process during the period.

^† Entry obliterated.

You recall that manufacturing overhead cost is applied to production on the basis of direct labor-hours and that all of the materials purchased during the period were used in production. Work in process inventories are insignificant and can be ignored.

It is now 8:30 a.m. The executive committee meeting starts in just one hour; you realize that to avoid looking like a bungling fool you must somehow generate the necessary “backup” data for the variances before the meeting begins. Without backup data it will be impossible to lead the discussion or answer any questions..

5. What was the actual rate paid per direct labor-hour? (Round your answer to 2 decimal places.)

6. How much actual variable manufacturing overhead cost was incurred during the period?

Answer 1

• WN1:

Direct material standard cost = $ 779760.
Standard direct material cost per unit = $41.04
Actual units produced = 779760/41.04 = 19000 units.

• WN2:

Total Direct Labor Spending variance = 4000U + 15500U = $ 19500 U
This means that Actual labor cost is $19500 more than standard labor cost.
Standard labor cost = $ 294500
Actual labor cost = 294500 + 19500 = $ 314,000

• WN3:

Standard labor hours for 19000 units = 19000 x 1 DLH = 19000 DLHs
Standard Labor Rate = $15.5 per DLH

• WN4:

Labor efficiency Variance = (Standard hours – Actual Hours) x Standard rate.
15500U = (19000 DLHs – Actual Hours) x $15.5 per DLH
- 15500 = (19000 – Actual Hours) x 15.5
-15500 = 294500 – 15.5AH
15.5AH = 294500 + 15500
AH = 310000/15.5
Actual Hours = 20,000 DLHs

• Answer 5: Actual rate per direct labor hour

Labor Rate Variance = (Standard Rate – Actual rate) x Actual DLHs
4000U = ($15.5 per DLH – Actual rate) x 20,000 DLHs [WN4]
- 4000 = (15.5 – Actual rate) x 20000
- 4000 = 310000 – 20000AR
20000AR = 310000 + 4000
AR = 314000/20000

Actual Rate = $15.70 per direct labor hours

• Answer 6: Total Actual Variable Overhead

Actual Hours (AH) = 20,000
Standard Hours (SH) = 19,000 [WN3]
Standard rate for Variances = $9.3 per DLH

Variable Overhead rate variance = (Standard Rate – Actual rate) x Actual hours
4700F = ($9.3 – AR) x 20,000 DLHs
4700 = 186000 – 20000AR
20000AR = 186000 – 4700
AR = 181300/20000
Actual Rate for Variable Overhead = $ 9.065 per DLHs

Total Actual variable Overhead = Actual Labor Hours x Actual rate for variable overhead
= 20,000 DLHs x $ 9.065 per DLHs
= $ 181,300 [Answer]

Variable Overhead Efficiency Variance= (Standard Hours – Actual Hours) x Standard Rate
= (19,000 – 20000)x $9.3
= - 1000 x 9.3
= - 9300

= $ 9,300 Unfavourable