Question

Determining Unit Costs, Variance Analysis, and Interpretation:

Happy Dog Company, a manufacturer of dog food, produces its product in 1,000-bag batches. The

standard cost of each batch consists of 8,000 pounds of direct materials at $0.60 per pound, 48 direct

labor hours at $13.25 per hour, and variable overhead cost (based on machine hours) at the rate of

$15 per hour with 16 machine hours per batch. The following variable costs were incurred for the last

1,000-bag batch produced:

Direct materials  . . . . . . . . . . . . . . . . 8,300 pounds costing $4,731 were purchased and used

Direct labor. . . . . . . . . . . . . . . . . . . . 45 hours costing $675

Variable overhead. . . . . . . . . . . . . . . $338

Machine hours used. . . . . . . . . . . . . 18 hours

Required

a. Determine the actual and standard variable costs per bag of dog food produced, separated into

direct materials, direct labor, and variable overhead.

b. For the last 1,000-bag batch, determine the standard cost variances for direct materials, direct

labor, and variable overhead.

c. Explain the possible causes for each of the variances determined in requirement (b)

Answer 1

Solution a:

Computation of standard and actual variable cost per bag
Particulars	Standard cost	Actual cost
Direct material	$4.800	$4.731
Direct labor	$0.636	$0.675
Variable overhead	$0.240	$0.338
Variable cost per bag	$5.676	$5.744

Solution b:

Standard cost of direct material for 1000 bag batch = 8000*$0.60 = $4,800

Actual cost fo direct material = $4,731

Standard cost variances for direct materials = Standard cost - Actual cost = $4,800 - $4,731 = $69 F

Standard cost of direct labor for 1000 bag batch = 48 * $13.25 = $636

Actual cost of direct labor = $675

Standard cost variances for direct labor = Standard cost - Actual cost = $636 - $675 = $39 U

Standard cost of variable overhead for 1000 bag batch = 15 * $16 = $240

Actual cost of variable overhead = $338

Standard cost variances for variable overhead = Standard cost - Actual cost = $240 - $338 = $98 U

Solution c:

The possible cause for each variance are price/rate variance and quantity/efficiency variances.

Material price variance = (SP - AP) * AQ = ($0.60 - $0.57) * 8300 = $249 F

Material quantity variance = (SQ - AQ) * SP = (8000 - 8300)$0.60 = $180 U

Direct labor rate variance = (SR - AR) * AH = ($13.25 - $15)*45 = $78.75 U

Direct labor efficiency variance = (SH - AH) * SR = (48 - 45) * $13.25 = $39.75 F

Variable overhead rate variance = (SR - AR) * AH = ($15 - $18.7777)*18 = $68 U

Variable overhead efficiency variance = (SH - AH)* SR = (16-18) * $15 = $30 U