Question

Clarissa McWhirter, vice-president of Cyprus Company, was pleased to see a small variance on the income statement after the trouble the company had been having in controlling manufacturing costs. She noted that the $19,821 overall manufacturing variance reported last period was well below the 3% limit that had been set for variances. The company produces and sells a single product. The standard cost card for the product follows:

  

Standard Cost Card—Per Unit
Direct materials, 4 metres at $2.70 per metre	$	10.80
Direct labour, 1.7 direct labour-hours at $10.5 per direct labour-hour		17.85
Variable overhead, 1.7 direct labour-hours at $2.8 per direct labour-hour		4.76
Fixed overhead, 1.7 direct labour-hours at $6 per direct labour-hour		10.20
Standard cost per unit	$	43.61

  

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

  

a.	The company manufactured 22,000 units of product during the year.
b.	A total of 86,990 metres of material was purchased during the year at a cost of $2.90 per metre. All of this material was used to manufacture the 22,000 units. There were no beginning or ending inventories for the year.
c.	The company worked 38,600 direct labour-hours during the year at a cost of $10.30 per hour.
d.	Overhead cost is applied to products on the basis of standard direct labour-hours. Data relating to manufacturing overhead costs follow:

  

Denominator activity level (direct labour-hours)		36,900
Budgeted fixed overhead costs (from the flexible budget)	$	221,400
Actual fixed overhead costs	$	219,800
Actual variable overhead costs	$	109,590

  

Required:

1.	Compute the direct materials price and quantity variances for the year. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

     

2.	Compute the direct labour rate and efficiency variances for the year. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

            

3.	For manufacturing overhead, compute the following:

a.	The variable overhead spending and efficiency variances for the year. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

                

b.	The fixed overhead budget and volume variances for the year. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

            

4.	Compute the total variance. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

             

Answer 1

Solution 1:

Standard quantity of material (SQ) = 22000*4 = 88000 meter

Standard price of material = $2.70

Actual price of material = $2.90

Actual quantity of material = 86990 meter

Direct material price variance = (SP - AP)*AQ = ($2.70 - $2.90)*86990 = $17,398 U

Direct material quantity variance = (SQ - AQ) * SP = (88000 - 86990) * $2.70 = $2,727 F

Solution 2:

Standard labor hours for actual production = 22000*1.70 = 37400 hours

Standard rate of direct labor = $10.50 per hour

Actual hours of direct labor = 38600 hours

Actual rate of direct labor = $10.30 per hour

Direct Labour rate variance = (SR - AR) * AH = ($10.50 - $10.30) * 38600 = $7,720 F

Direct labour efficiency variance = (SH - AH)*SR = (37400 - 38600) * $10.50 = $12,600 U

Solution 3a:

Standard labor hours for actual production = 22000*1.70 = 37400 hours

Standard rate of variable overhead = $2.80 per hour

Actual hours of direct labor = 38600 hours

Actual rate of variable overhead = $109,590 / 38600 = $2.8391 per hour

Variable overhead spending variance = (SR - AR) * AH = ($2.80 - $2.8391) * 38600 = $1,510 U

Variable overhead efficiency variance = (SH - AH)*SR = (37400 - 38600) * $2.80 = $3,360 U

Solution 3b:

Budgeted fixed overhead = $221,400

Applied fixed overhead = 22000*1.7*$6 = $224,400

Actual fixed overhead = $219,800

Fixed overhead budget variance = Budgeted fixed overhead - Actual fixed overhead = $221,400 - $219,800 = $1,600 F

Fixed overhead volume variance = Applied fixed overhead - Budgeted fixed overhead = $224,400 - $221,400 = $3,000 F

Solution 4:

Computation of Total Variance
Particulars	Variance	Unfavorable / Favorable
Direct Material Price variance	$17,398.00	U
Direct Material quantity variance	$2,727.00	F
Direct labour rate variance	$7,720.00	F
Direct labour efficiency variance	$12,600.00	U
Variable overhead rate variance	$1,510.00	U
Variable overhead efficiency variance	$3,360.00	U
Fixed overhead budget variance	$1,600.00	F
Fixed overhead volume variance	$3,000.00	F
Total Variance	$19,821.00	U