Question

Liquid manufactures a single product that has a standard materials cost of $20 (2 units of raw materials at $10 per unit), standard direct labor cost of $18 (1 hour per unit), and standard variable overhead cost of $8 (based on direct labor-hours). Fixed overhead is budgeted at $34,000 per month.

The following data pertain to operations for May of this year:

Raw materials purchased	3,600 units costing $31,620
Raw materials used in production of 1,500 units of finished product	3,200 units of raw materials
Direct labor used	1,500 hours costing $30,000
Variable overhead costs incurred	$11,920
Fixed overhead costs incurred	$35,000

Required:

a.	Compute the following variances (show calculations):

	1.	Materials quantity variance
	2.	Labor rate variance
	3.	Labor efficiency variance
	4.	Variable overhead spending variance
	5.	Variable overhead efficiency variance

Answer 1

Ans:

1.       Material quantity variance:

(Actual raw materials used- standard direct material required for production of 1500 units)*standard rate per unit

= (3200-1500*2)*$10

= $2000 “U”

2.       Labor rate variance= (Actual labor rate per hour-standard rate per hour)*quantity of direct labor used

                                                       = ($20-$18)*1500

                                                       = $3000”U”

3.       Labor efficiency variance:

( Standard labor allowed-number of hours actually worked)*standard labor rate per hour

            = (1500*1-1500)*$18

              = Nil

4.       Variable overhead spending variance= (standard overhead rate per hour-actual overhead rate per hour)*actual direct labor worked

=( $8-$11920/1500)*1500

= $75 “F”

5.       Variable overhead efficiency variance= (Standard labor allowed-number of hours actually worked)*standard variable overhead rate per hour

= (1500-1500)*$8

= Nil