Question

Direct Materials, Direct Labor, and Factory Overhead Cost Variance Analysis

Mackinaw Inc. processes a base chemical into plastic. Standard costs and actual costs for direct materials, direct labor, and factory overhead incurred for the manufacture of 6,800 units of product were as follows:

	Standard Costs		Actual Costs
Direct materials	8,800 lb. at $5.70		8,700 lb. at $5.50
Direct labor	1,700 hrs. at $16.40		1,740 hrs. at $16.60
Factory overhead	Rates per direct labor hr.,
	based on 100% of normal
	capacity of 1,770 direct
	labor hrs.:
		Variable cost, $3.30	$5,550 variable cost
		Fixed cost, $5.20	$9,204 fixed cost

Each unit requires 0.25 hour of direct labor.

Required:

a. Determine the direct materials price variance, direct materials quantity variance, and total direct materials cost variance. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number.

Direct materials price variance	$
Direct materials quantity variance
Total direct materials cost variance	$

b. Determine the direct labor rate variance, direct labor time variance, and total direct labor cost variance. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number.

Direct labor rate variance	$
Direct labor time variance
Total direct labor cost variance	$

c. Determine variable factory overhead controllable variance, the fixed factory overhead volume variance, and total factory overhead cost variance. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number.

Variable factory overhead controllable variance	$
Fixed factory overhead volume variance
Total factory overhead cost variance	$

Answer 1

Ans:

a.

Price variance	- 1,740	Favorable	Explanation 1
Quantity variance	- 570	Favorable	Explanation 2
Total direct material cost variance	- 2,310	Favorable	Explanation 3

Explanation 1:-

DM Price Variance = ( SP − AP ) × AQ

= (5.70 - 5.50) * 8,700

= 1,740

Explanation 2:-

DM Quantity Variance = ( SQ − AQ ) × SP

= (8,800 - 8,700) * 5.70

= 570

Explanation 3:-

Total direct material cost variance = Price variance + quantity variance

= (-1,740) + (-570)

= -2,310

b.

Direct cost variance

rate variance = (Std rate - actual rate ) actual hr consumed

= (16.40 - 16.60 ) 1740

= $348 (Unfavorable)

Time variance = (1700- 1740) *16.40 = 656 (unfavorable)

total direct labor cost variance =348+656= 1004 (unfavorable)

c.

Variable factory overhead controllable variance	- 60	Favorable	Explanation 4
Fixed factory overhead volume variance	434	Unfavorable	Explanation 5
Total factory overhead cost variance	364	Unfavorable	Explanation 6

Explanation 4:-

Variable factory overhead controllable variance = Actual Variable Factory Overhead – Budgeted Variable Factory Overhead

= 5,550 - (0.25 * 6,800 * 3.30)

= 60 Favorable

Explanation 5:-

Fixed factory overhead volume variance = (Standard Hours for 100% of normal capacity – Standard Hours for Actual Units Produced) * Fixed Factory Overhead Rate

= (1,770 - 1,700) * $5.20

= 364 Unfavorable

Explanation 6:-

Total factory overhead cost variance = Variable Factory Overhead Controllable Variance + Fixed Factory Overhead Volume Variance

= (-60) + 364

= 294 Unfavorable