Question

The Deep Thought Company is making 42 supercomputers. Deep Thought’s costing system has two direct-cost categories: direct materials and direct manufacturing labor. Manufacturing overhead (both variable and fixed) is allocated to the supercomputers on the basis of standard direct manufacturing labor-hours (DLH). At the beginning of 2017, Deep Thought adopted the following standards for its manufacturing costs:

Input Cost per Output Unit

Direct materials 5 lb. at $4 per lb. $ 20.00

Direct manufacturing labor 4 hrs. at $16 per hr. 64.00

Manufacturing overhead:

Variable $8 per DLH 32.00

Fixed $9 per DLH 36.00

Standard manufacturing cost per output unit $152.00

The denominator level for total manufacturing overhead per month in 2017 is 37,000 direct manufacturing labor-hours. Deep Thought’s budget for January 2017 was based on this denominator level. The records for January indicated the following:

Direct materials purchased 40,300 lb. at $3.80 per lb.

Direct materials used 37,300 lb.

Direct manufacturing labor 31,400 hrs. at $16.25 per hr.

Total actual manufacturing overhead (variable and fixed) $650,000

Actual production 7,600 output units

Required:

1. Prepare a schedule of total standard manufacturing costs for the 7,600 output units in January 2017.

2. For the month of January 2017, compute the following variances, indicating whether each is favorable (F) or unfavorable (U):

a. Direct materials price variance, based on purchases

b. Direct materials efficiency variance

c. Direct manufacturing labor price variance

d. Direct manufacturing labor efficiency variance

e. Total manufacturing overhead spending variance

f. Variable manufacturing overhead efficiency variance

g. Production-volume variance

Answer 1

Schedule of total standard manufacturing cost
	Standard price per unit	Total
Direct material	$20	$152,000 (7,600*$20)
Direct manufacturing labor	$64	$486,400 (7,600*$64)
Variable manufacturing overhead	$32	$243,200 (7,600*$32)
Fixed manufacturing overhead	$36	$273,600 (7,600*$36)
Total standard manufacturing cost		$1,155,200

2a.

Direct material price variance = Actual quantity purchased*standard price - Actual quantity purchased*actual price

Direct material price variance = 40,300*$4 - 40,300*$3.8

Direct material price variance = $161,200 - 153,140 = $8,060 Favorable

2b.

Direct material efficiency variance = Standard quantity*standard price - Actual quantity consumed*standard price

Standard quantity = actual output*standard quantity allowed

Standard quantity = 7,600*5 Ibs = 38,000 Ibs

Direct material efficiency variance = 38,000*$4 - 37,300*$4

Direct material efficiency variance = $152,000 - 149,200 = $2,800 Favorable

2c.

Direct manufacturing labor price variance = Actual hours worked*standard rate - Actual hours worked*actual rate

Direct manufacturing labor price variance = 31,400*$16 - 31,400*$16.25

Direct manufacturing labor price variance = $502,400 - 510,250 = $7,850 Unfavorable

2d.

Direct manufacturing labor efficiency variance = Standard hours*standard rate - Actual hours worked*standard rate

Standard hours = Actual output*standard hours allowed per output

Standard hours = 7,600*4 hours = 30,400 hours

Direct manufacturing labor efficiency variance = 30,400*$16 - 31,400*$16

Direct manufacturing labor efficiency variance = $486,400 - 502,400 = $16,000 Unfavorable

2e.

Total manufacturing overhead spending variance = Actual hours*standard rate (absorbed overhead) - Actual overhead

Total manufacturing overhead spending variance = (31,400*$17) - $650,000

Total manufacturing overhead spending variance = $533,800 - 650,000 = $116,200 Unfavorable

2f.

Variable manufacturing overhead efficiency variance = Standard hours*standard rate - Actual hours*standard rate

Standard hours = 7,600*4 = 30,400

Variable manufacturing overhead efficiency variance = 30,400*$8 - 31,400*$8

Variable manufacturing overhead efficiency variance = $243,200 - 251,200 = $8,000 Unfavorable

2e.

Production volume variance = (Budgeted hours - standard hours) * standard fixed overhead rate per hour

Production volume variance = (37,000 - 30,400) * $9 = $59,400 Unfavorable

Or

Production volume variance = Absorbed overhead - Budgeted overhead

Production volume variance = 7,600*36 - 37,000*$9

Production volume variance = $273,600 - 333,000 = $59,400 Unfavorable