Question

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Potter Company – Variance Analysis

"That’s Great! Not only did our salespeople do a good job in meeting the sales budget this year, but our production people did a good job controlling costs as well," said Kimberly Donn, president of Potter Company. "Our $18,300 overall manufacturing cost variance is only 1.2% of the $1,536,000 budgeted cost of products made during the year. That's well within the 3% parameter set by management for acceptable variances. It looks like everyone will be in line for a bonus this year."

The company produces and sells a single product. The budgeted cost per product is as follows:

Direct materials, 2 feet at $8.45 per foot	$16.90
Direct labor, 1.4 direct labor hours at $16 per DLH	22.40
Variable OH, 1.4 direct labor hours at $2.50 per DLH	3.50
Fixed OH, 1.4 direct labor hours at $6 per DLH	8.40
Standard cost per unit	$51.20

The following additional information is available for the year just completed:

The company manufactured 30,000 units of product during the year

A total of 64,000 feet of material was purchased during the year at a cost of $8.55 per All of this material was used to manufacture the 30,000 units. There were no beginning or ending inventories for the year.

The company worked 43,500 direct labor hours during the year at a direct labor cost of $15.80 per

Overhead is applied to costs on the basis of budgeted direct-labor Data relating to manufacturing overhead costs follow:

Denominator activity level (DLH)	35,000
Budgeted fixed OH (from the flexible budget)	$210,000
Actual variable overhead costs incurred	$108,000
Actual fixed overhead costs incurred	$211,800

Requirements (show your work for partial credit):

Compute the direct materials price and efficiency variances for the year

Compute the direct labor price and efficiency variances for the year

Compute the variable overhead spending and efficiency variances for the year

Compute the fixed overhead spending and production-volume variances for the year

Total the variances you have computed, and compare the net amount with the $18,300 mentioned by Donn. Do you agree that bonuses should be given to everyone for good cost control during the year? Explain

Answer 1

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	Standard Qty for 30000 (30000*Column C)	Standard Quantity (SQ)	Standard Price (SP)	Standard Unit Cost
Direct Material	60000	2	8.45	16.9
Direct Labor	42000	1.4	16	22.4
Variable MOH	42000	1.4	2.5	3.5
Fixed MOH	42000	1.4	6	8.4
Acutal
Unit Produced		30000
	Actual Quantity	Actual Quantity per unit(AQ) Actual Q/30000	Actual Rate (AP) Given	Actual Cost
Direct Material	64000	2.13	8.55	547200
Direct Labor	43500	1.45	15.8	687300
Variable MOH	43500	1.45	2.48	108000
Fixed MOH	43500	1.45	4.87	211800
Direct Material Price Variance	(SP-AP)*AQ	(8.45-8.55)*64000	-6400	Unfavorable
Direct Material Quantity Variance	(SQ-AQ)*SP	(60000-64000)*8.45	-33800	Unfavorable
Direct Material Spending Variance	Price Var+Quantity Var		-40200	Unfavorable
Direct Labor Rate Variance	(SP-AP)*AQ	(16-15.8)*43500	8700	Favorable
Direct Labor Efficiency Variance	(SQ-AQ)*SP	(42000-43500)*16	-24000	Unfavorable
Direct Labor Spending Variance	Price Var+Quantity Var		-15300	Unfavorable
Direct Var Ovh Rate Variance	(SP-AP)*AQ	(2.5-2.48)*43500	870	Favorable
Direct Var OVH Efficiency Variance	(SQ-AQ)*SP	(42000-43500)*2.5	-3750	Unfavorable
Direct Var OVH Spending Variance	Price Var+Quantity Var		-2880	Unfavorable
Direct Fix Ovh Rate Variance	Budgeted Overhead-Actual Overhead	210000-211800	-1800	Favorable
Direct Fix OVH Volume Variance	Standard Rate applied on standard hour for actual quantity-Budgeted ovh	(42000*6)-210000	42000	Unfavorable
Direct Fix OVH Spending Variance	Price Var+Quantity Var		40200	Favorable

Total Variance
Direct Material Price Variance	-6400	Unfavorable
Direct Material Quantity Variance	-33800	Unfavorable
Direct Labor Rate Variance	8700	Favorable
Direct Labor Efficiency Variance	-24000	Unfavorable
Direct Var Ovh Rate Variance	870	Favorable
Direct Var OVH Efficiency Variance	-3750	Unfavorable
Direct Fix Ovh Rate Variance	-1800	Favorable
Direct Fix OVH Volume Variance	42000	Unfavorable
Total Variance	-18180

Corrrectly computed by Donn and bonus should NOT be given to every one as it can be seen there are unfavorable variance in Direct Materal. Bonuses to be given only to Labor cost and managers related to this.