Question

Preble Company manufactures one product. Its variable manufacturing overhead is applied to production based on direct labor-hours and its standard cost card per unit is as follows:

Direct material: 5 pounds at $8.00 per pound	$	40.00
Direct labor: 2 hours at $14 per hour		28.00
Variable overhead: 2 hours at $5 per hour		10.00
Total standard variable cost per unit	$	78.00

The company also established the following cost formulas for its selling expenses:

	Fixed Cost per Month				Variable Cost per Unit Sold
Advertising	$	200,000
Sales salaries and commissions	$	100,000			$	12.00
Shipping expenses					$	3.00

The planning budget for March was based on producing and selling 25,000 units. However, during March the company actually produced and sold 30,000 units and incurred the following costs:

a. Purchased 160,000 pounds of raw materials at a cost of $7.50 per pound. All of this material was used in production.

b. Direct-laborers worked 55,000 hours at a rate of $15.00 per hour.

c. Total variable manufacturing overhead for the month was $280,500.

d. Total advertising, sales salaries and commissions, and shipping expenses were $210,000, $455,000, and $115,000, respectively.

1. What raw materials cost would be included in the company’s flexible budget for March?

2. What is the materials quantity variance for March? (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance.). Input the amount as a positive value.)

3. What is the materials price variance for March? (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance.). Input the amount as a positive value.)

4. If Preble had purchased 170,000 pounds of materials at $7.50 per pound and used 160,000 pounds in production, what would be the materials quantity variance for March? (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance.). Input the amount as a positive value.)

Answer 1

Ans. 1. Calculation of Material cost to be included in flexible budget

Revised No of units produced and sold = 30000

Raw material required for each unit = 5pound

Cost of raw material each pound = 8

Total cost of Raw material included in flexible budget (30000X5X8) = 1200000

2. Calculation of material Quantity variance = (Std.qty-actual qty)Xstd rate

Standard quantity of raw material (30000x5) = 150000

Actual quantity of raw used = 160000

Standard rate per raw material pound $8

Raw material qty variance = (150000-160000)X8 = 80000(UF)

3.Calculation of raw material price variance = (Standard rate-Actual rate)XTotal no raw material purchase

Standard rate = $8

Actual rate = $7.5

Actual raw material purchase = 160000

Raw material price variance = (8-7.5)X160000 = 80000 (F)

4. If Purchase quantity of raw material is 170000 and used for production is 160000

then material quantity variance will be remain same 80000(UF), because for calculating material qty variance we have to consider unit used for cost of goods sold.