Question

Buil Corporation manufactures a single product. The standard cost per unit of the product is as follows.

Direct materials—2 pounds of plastic at $6 per pound $12

Direct labour—2 hours at $13 per hour 26

Variable manufacturing overhead 7

Fixed manufacturing overhead 5

______

Total standard cost per unit $50

The master manufacturing overhead budget for the month based on the normal productive capacity of 20,000 direct labour hours (10,000 units) shows total variable costs of $70,000 ($3.50 per labour hour) and total fixed costs of $50,000 ($2.50 per labour hour). Normal productive capacity is 20,000 direct labour hours. Overhead is applied on the basis of direct labour hours. Actual costs for November in producing 9,700 units were as follows.

  Direct materials (20,000 pounds) $119,000

Direct labour (19,600 hours) 256,760

Variable overhead 68,800

Fixed overhead 50,000

Total manufacturing costs $494,560

The purchasing department normally buys the quantities of raw materials that are expected to be used in production each month. Raw materials inventories, therefore, can be ignored.

Instructions

a) Compute price and quantity variances for materials and labour respectively. Indicate if each of the variances is favourable or unfavourable.

b) Compute the total overhead variance.

Answer 1

Solution a:

Direct Material Cost Variance
Actual Cost					Standard cost for actual quantity					Standard Cost
AQ *	AP =				AQ *	SP =				SQ *	SP =
20000	$5.95	$119,000.00			20000	$6.00	$120,000.00			19400	$6.00	$116,400.00
			$1,000.00	F				$3,600.00	U
			Direct Material Price Variance					Direct Material Qty variance
Direct material price variance					$1,000.00	F
Direct material quantity variance					$3,600.00	U
Direct material cost variance					$2,600.00	U

Direct Labor Cost Variance
Actual Cost					Standard cost for actual quantity					Standard Cost
AH *	AR =				AH *	SR =				SH *	SR =
19600	$13.10	$256,760.00			19600	$13.00	$254,800.00			19400	$13.00	$252,200.00
			$1,960.00	U				$2,600.00	U
			Direct Labor rate Variance					Direct Labor Efficiency Variance
Direct Labor Rate variance					$1,960.00	U
Direct Labor Efficiency variance					$2,600.00	U
Direct labor cost variance					$4,560.00	U

Solution b:

Total overhead variance = Overhead applied - Actual overhead

= (9700*2*$6) - ($68,800 + $50,000) = $2,400 U