Question

Koontz Company manufactures a number of products. The standards relating to one of these products are shown below, along with actual cost data for May.

	Standard Cost per Unit						Actual Cost per Unit
Direct materials:
Standard: 1.80 feet at $1.20 per foot	$	2.16
Actual: 1.75 feet at $1.60 per foot							$	2.80
Direct labor:
Standard: 0.90 hours at $16.00 per hour		14.40
Actual: 0.95 hours at $15.40 per hour								14.63
Variable overhead:
Standard: 0.90 hours at $5.60 per hour		5.04
Actual: 0.95 hours at $5.00 per hour								4.75
Total cost per unit	$	21.60					$	22.18
Excess of actual cost over standard cost per unit				$	0.58

The production superintendent was pleased when he saw this report and commented: “This $0.58 excess cost is well within the 5 percent limit management has set for acceptable variances. It's obvious that there's not much to worry about with this product."

Actual production for the month was 10,500 units. Variable overhead cost is assigned to products on the basis of direct labor-hours. There were no beginning or ending inventories of materials.

Required:

1. Compute the following variances for May:

a. Materials price and quantity variances.

b. Labor rate and efficiency variances.

c. Variable overhead rate and efficiency variances.

2. How much of the $0.58 excess unit cost is traceable to each of the variances computed in (1) above.

3. How much of the $0.58 excess unit cost is traceable to apparent inefficient use of labor time?

Answer 1

Solution

Part 1(a) Material Price Variance

Material Price Variance is the variance arises in the material cost due to difference in actual material purchase price from standard material price. Mathematically, it is calculated as below:

Material Price Variance = Actual Quantity (Standard Price – Actual Price)

Note --- Here actual quantity means actual quantity of material PURCHASED. If the question does not provide the information about material purchase, it is taken as equal to material consumed.

Direct Material Price Variance
Actual Price	$1.60	Per Foot
Standard Price	$1.20	Per Foot
Variance or Difference in Price	$0.40	Per Foot
x Actual Quantity PURCHASED (10,500*1.75)	18375	Foot
Material Price Variance	$7,350	Unfavorable

Material Quantity/Efficiency/Usage Variance

Material Efficiency (Usage) Variance measures variance in material cost due to usage/consumption of materials. It is calculated as below:

Material Quantity Variance = Standard Price (Standard Quantity for Actual Production – Actual Quantity USED)

Note --- Here actual quantity means actual quantity of material CONSUMED/USED

Direct Material Quantity Variance
Standard Quantity Allowed for actual production:
Actual Production/Activity	10500	Units
x Allowed Standard Quantity Per Unit	1.8	Foot
Total Standard Quantity Allowed for actual production (SQAP)	18900	Foot
Actual Quantity USED (AQU)	18375	Foot
Variance or Difference in Quantity	525	Foot
x Standard Price (SP)	$1.20	Per Foot
Material Quantity Variance	$630	Favorable

Part 1(b) -- Labor Rate/Price Variance

Labor Price Variance – It arises due to difference in actual rate paid from standard rate. It is calculated as below:

Labor Price Variance = Actual Time (Standard Rate per hour – Actual Rate per hour)

Here, actual time means time for which wage has been paid.

Labor Rate Variance
Actual Hourly Rate	$15.40	Per Hour
Standard Hourly Rate	$16.00	Per Hour
Variance or Difference in Rate	$0.60	Per Hour
x Actual Labor Hours worked (10500*0.95)	9975	Hours
Labor Rate Variance	$5,985	Favorable

Labor Quantity Variance

Labor Efficiency Variance – It arises due to variation in the working hours from the set standard.

Labor Quantity / Efficiency Variance
Standard Hours Allowed for actual production:
Actual Production	10500	Units
x Allowed Standard Hours Per Unit	0.9	hours
Total Standard Hours Allowed for actual production (SHAP)	9450	hours
Actual Labor Hours Worked (AH)	9975	hours
Variance or Difference in Hours	525	hours
x Standard Hourly Rate (SHR)	$16.00	per hour
Labor Efficiency Variance	$8,400	Unfavorable

Part 1© --

Variable Overhead Spending/Rate Variance
Actual Hourly Variable Overhead Rate	5.00	Per Hour
Standard Hourly Variable Overhead Rate	5.60	Per Hour
Variance or Difference in Rate	0.60	Per Hour
x Actual Direct Labor Hours Worked	9975	Hours
Variable Overhead Rate Variance	$5,985	Favorable
Variable Overhead Efficiency/Quantity Variance
Standard Hours Allowed for actual production:
Actual Production	10,500	Pools
x Allowed Standard Hours Per Unit	0.9	MHs
Total Standard Hours Allowed for actual production (SHAP)	9450	hours
Actual Hours Worked (AH)	9975	Hours
Variance or Difference in Hours	525	hours
x Standard Hourly Variable Overhead Rate	$5.60	per hour
Variable Overhead Efficiency Variance	$2,940	Unfavorable

Part 2 --- How much of the $0.58 excess unit cost is traceable to each of the variances computed in (1) above.

	$$
Direct material price variance	7350	U
Direct labor rate variance	5985	F
Variable Overhead Rate Variance	5985	F
Total Variance	4620	F
Total Produced Units	10500	Units
Variance Per Unit due to Rate ($4620 / 10500)	0.44	F

Part 3 --- How much of the $0.58 excess unit cost is traceable to apparent inefficient use of labor time?

	$$
Direct material usage Variance	$630	F
Direct labor efficiency Variance	$8,400	U
Variable Overhead Efficiency Variance	$2,940	U
Total Variance due to labor time	$10,710	U
Total Produced Units	10500	Units
Variance Per Unit due to Labor Time ($10,710 / 10,500)	$1.02	U

Total Variance Per Unit = Variance due to rate or price $0.44 F + Variance due to time $1.20 U = $0.58 U

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Pls ask separate question for remaining parts