Question

Aaha Inc. produces premium protective automotive covers. The direct materials and direct labour standards for one car cover are as follows:

	Standard Quantity or Hours			Standard Price or Rate			Standard Cost
Direct materials		9.0	metres of cloth	$	10	per metre	$	90.00
Direct labour		0	hours	$	20	per hour	$	7
Variable overhead		0	hours	$	8	per hour	$	3

Budgeted fixed overhead cost is $17,400, and the normal production volume is 2,885 car covers. Overhead is applied on the basis of direct labour-hours.

In September, the following activity was recorded:

•	24,300 metres of cloth were purchased at a cost of $10.50 per metre.
•	All of the purchased material was used to produce 2,700 car covers.
•	585 direct labour-hours were recorded at a total labour cost of $11,700.
Actual variable overhead cost was $5,600, and fixed overhead cost was $16,850.

Required:

1.	Compute all direct materials variances for September. (Indicate the effect of each variance by selecting "F" for favourable, "U" for unfavourable, and "None" for no effect (i.e., zero variance).)

           

2.	Compute all direct labour cost variances for September. (Indicate the effect of each variance by selecting "F" for favourable, "U" for unfavourable, and "None" for no effect (i.e., zero variance).)

  

      

3.	Calculate the total under- or overapplied overhead. Show all the variances calculated and indicate if each variance is favourable or unfavourable. (Indicate the effect of each variance by selecting "F" for favourable, "U" for unfavourable, and "None" for no effect (i.e., zero variance). Do not round intermediate calculations and round "Fixed overhead volume variance and total variance" to 2 decimal places.)

Answer 1

1. To compute the direct materials price variance, take the difference between the standard price (SP) and the actual price (AP), and then multiply that result by the actual quantity (AQ):

Direct materials price variance = (SP – AP) x AQ

Direct materials price variance = (10-10.5)*24300

Direct materials price variance = (10-10.5)*24300

Direct materials price variance = -12150 (unfavourable) To get the direct materials quantity variance, multiply the standard price by the difference between the standard quantity (SQ) and the actual quantity: Direct materials quantity variance = SP x (SQ – AQ) Direct materials quantity variance = 10*((9*2885)-24300)) Direct materials quantity variance = 16,650(Favourable) Total direct materials variance=Direct materials price variance+Direct materials quantity variance Total direct materials variance=-12150+16650 Total direct materials variance=4500(Favourable) 2. Direct labor rate variance is the product of actual direct labor hours and the difference between the standard direct labor rate and actual direct labor rate. DL Rate Variance = ( SR ? AR ) × AH DL Rate Variance =(20-(11700/585))*585 DL Rate Variance = 0 No effect To get the direct labor quantity variance (also known as the direct labor efficiency variance), multiply the standard rate (SR) by the difference between total standard hours (SH) and the actual hours worked (AH): Direct labor quantity variance = SR x (SH – AH) Direct labor efficiency variance =20*( (7/20*2885)-585) Direct labor efficiency variance = 8495 Favourable The direct labor variance equals the difference between the total budgeted cost of labor (SR x SH) and the actual cost of labor, based on actual hours worked (AR x AH): Total direct labor variance = (SR x SH) – (AR x AH) Total direct labor variance = ((20*7/20*2885)-(11700) Total direct labor variance = 8495 Favourable 3. Variable Overhead Variance Variable Overhead Spending Variance s the product of actual units of the allocation base of variable overhead and the difference between standard variable overhead rate and actual variable overhead rate. VOH Spending Variance = ( SR ? AR ) × AU VOH Spending Variance =(8-(5600/585))*585 VOH Spending Variance =-920 Unfavourable The variable overhead efficiency variance=Standard overhead rate x (Standard hours-Actual) The variable overhead efficiency variance=8*((7/20*2885)-585) The variable overhead efficiency variance=3398 Favourable Total Variable Overhead Variance=VOH Spending Variance+variable overhead efficiency variance Total Variable Overhead Variance=-920+3398 Total Variable Overhead Variance=2478 Favourable fixed overhead volume variance= Absorbed Fixed Overheads-Budgeted Fixed Overheads fixed overhead volume variance=(2700*(17400/2885))-17400 fixed overhead volume variance=-1115.77 Unfavourable Controllable Variance Actual Overheads Fixed Factory Overheads 16,850 Variable Factory Overheads 5,600 22,450 Less Budgeted Overheads Fixed Budgeted Factory Overheads=(17400/(7/20*2885))*585 10,080.71 Variable Factory Overheads Budgeted=8*7/20*2885 8,078 18,158.71 Controllable Variance 4,291.29 Unfavourable