Question

1. Gro-well Pty Ltd produces a single product, liquid fertilizer, in containers of one size, and uses a standard costing system. Based on 5000 direct labour hours per month,and with budgeted fixed factory overhead of $25000 per month, the standard cost specification is given as follows:

Standard cost specification- per container

            

Direct Material	4 litres @ 2.50 per litre	$10.00
Direct Labour	30 minutes @ $12.00 per hour	$6.00
Factory overhead	30 minutes @ $9.00 per direct labour hour	$4.50
		$20.50

Actual results for the month of April were:

Purchases of Material                                                                                 $

Direct material 40,000 litres $2.60 per litre                104,000

Factory supplies                                                                                           3,000

Issue of material

             Direct material 36,100 litres @ 2.50 per litre                90,250

             Indirect material                                                                                           3,200

Total factory Payroll paid                                                                                         60,554

Factory labour incurred

             Direct labour                 4,740 hours @ 12.10 per hour                          57,354

Indirect labour                                                                                      3,800

Invoices received for other factory overhead expenses                       38,000

Actual production-9500 containers

Gro-well Pty Ltd calculates and analyses all variances as early as possible.

Required:

1. Calculate standard cost variances for the month of April.

2. Provide the possible reasons for unfavorable variances.

Answer 1

A	MATERIAL VARIANCE
1	MATERIAL PRICE VARIANCE
	FORMULA:	(STANDARD PRICE PER UNIT - ACTUAL PRICE PER UNIT) * ACTUAL QUANTITY PURCHASED
	STANDARD PRICE PER UNIT	$            2.50
	ACTUAL PRICE PER UNIT	$            2.60
	ACTUAL QUANTITY PURCHASED	40,000
	MATERIAL PRICE VARIANCE	= (2.5 - 2.6) * 40000
		$       (4,000) ADVERSE
		THE PRICE OF PER UNIT HAS INCREASED DUE TO WHICH MATERIAL PRICE VARIANCE IS UNFAVORABLE.
2	MATERIAL YIELD VARIANCE
	FORMULA:	(STANDARD MATERIAL REQUIRED - ACTUAL UNIT USED ) * STANDARD PRICE OF MATERIAL PER UNIT
	STANDARD PRICE OF MATERIAL PER UNIT	$            2.50
	ACTUAL UNIT USED	36,100
	STANDARD MATERIAL REQUIRED	=4*9500 = 38,000 LITERS
	MATERIAL YIELD VARIANCE	= (38000 - 36100 ) * 2.5
		$         4,750 FAVORABLE

THE ACTUAL QUANTITY CONSUMED IS LESS DUE TO WHICH MATERIAL YIELD VARIANCE IS FAVORABLE.

B	LABOR VARIANCE

1	LABOR RATE VARIANCE
	FORMULA:	(STANDARD RATE PER HOUR - ACTUAL RATE PER HOUR)* ACTUAL LABOR HOURS USED
	STANDARD RATE PER HOUR	$         12.00
	ACTUAL RATE PER HOUR	$         12.10
	ACTUAL LABOR HOURS USED	4,740
	MATERIAL PRICE VARIANCE	= (12.00 - 12.10) * 4740
		$           (474)	ADVERSE
	THE RATE OF PER HOUR HAS INCREASED DUE TO WHICH LABOR RATE VARIANCE IS UNFAVORABLE.
2	LABOR EFFICIENCY VARIANCE
	FORMULA:	(STANDARD LABOR HOURS REQUIRED - ACTUAL LABOR HOURS USED ) * STANDARD RATE PER HOUR
	STANDARD RATE PER HOUR	$         12.00
	ACTUAL LABOR HOURS USED	4,740
	STANDARD LABOR HOURS REQUIRED	=0.5*9500 = 4,750 HOURS
	LABOR EFFICIENCY VARIANCE	= (4,750 - 4,740) * 12.00
		$             120	FAVORABLE
	THE ACTUAL LABOR HOURS USED IS LESS DUE TO WHICH LABOR EFFICIENCY VARIANCE IS FAVORABLE.

C	FACTORY OVERHEAD VARIANCE
	FORMULA :	TOTAL STANDARD OVERHEAD COST - ACTUAL FACTORY OVERHEAD COST
	ACTUAL FACTORY OVERHEAD COST	$ 38,000.00
	TOTAL STANDARD OVERHEAD COST	=4740*9
		$ 42,660.00
	FACTORY OVERHEAD VARIANCE	= 42660 - 38000
		$    4,660.00	FAVORABLE
	THE ACTUAL OVERHEAD IS LESS