Question

Hayes Chemical Company produces a chemical used in dry cleaning. Its accounting system uses standard costs. Standards for each 0.5-gallon can of chemical and actual data for Hayes Chemical follow:

Standards and budgeted information:

Gallons of material per can of chemical

1.20

Hours of labor per can of chemical

1.50

Standard cost per gallon of material

$6.00

Standard cost per hour of labor

$9.00

Overhead application rate per can

$7.75

Expected production - cans of chemical

20,000

Expected fixed overhead per year

$55,000

Variable overhead rate per 0.5-gallon can

$5.00

Actual information for 2018:

Cans produced

23,000

Gallons of material purchased

35,000

Cost of material purchased

$250,000

Gallons of material used in production

30,000

Cost of direct labor incurred

$290,000

Average wage rate per hour

$8.25

Actual overhead cost

$220,000

Required

a. Determine the standard cost per unit.

Material

$1.20

×

6.00

=

$         7.20

Labor

$1.50

×

$9.00

=

13.50

Variable overhead

5

5

5.00

Fixed overhead

$55,000

÷

20,000

=

2.75

Total unit cost

$       28.45

b. Calculate the material, labor, and overhead standards.

Material price variance

250000

×

=

Favorable or unfavorable?

Material quantity variance

×

=

Favorable or unfavorable?

Labor rate variance

×

=

Favorable or unfavorable?

Labor efficiency variance

×

=

Favorable or unfavorable?

Overhead controllable variance

―

=

Favorable or unfavorable?

Overhead volume variance

―

=

Favorable or unfavorable?

c. List a possible cause for each variance.

Unfavorable Material Price Variance:

Unfavorable Material Quantity Variance:

Favorable Labor Rate Variance:

Unfavorable Labor Efficiency Variance:

Unfavorable Controllable Overhead Variance:

Favorable Overhead Volume Variance:

Answer 1

Material Price variance				=(AR-SR)*AQ purchased
				=(7.14-6)*35000
				39900
It is unfavourable
Material Quantity variance				=(SQ-AQ used )*SP
				=(20000-30000)*6
				60000
it is unfavorable
Labour rate variance			=(SR-AR)*AH USED
AH used			=290000/8.25
AH used			35151.52
			=(9-8.25)*35152
Labour rate variance			26364
It is favourable
Labour efficiency variance			=(Actual hours -standard hour allowed )SR
			=(29000/8.25- 20000*1.5)9
			46368
It is unfavorable
Variable OH variance			=(AR-SR)*AH worked
			=(8.25-5)*3515
			11423.75
it is unfavorable
Material price variance It is the responsibility of production manager to keep a check on excessive use of materials. However if purchase manager purchases low quality materials to improve the direct materials price variance then purchasing department would be considered responsible for the variance. Material quantity variance Generally speaking, the purchase manager has control over the price paid for goods and is therefore responsible for any price variation. Many factors influence the price paid for the goods, including number of units ordered in a lot, how the order is delivered, and the quality of materials purchased. A deviation in any of these factors from what was assumed when the standards were set can result in price variance. For example purchase of second grade materials rather than top-grade materials may be a reason of favorable price variance, since the lower grade material will generally be less costly but perhaps less suitable for production and can be a reason of unfavorable materials quantity variance. Favourable labour rate variance: The expected mix of pay levels among the production staff The amount of overtime likely to be incurred The amount of new hiring at different pay rates The number of employees retiring The number of promotions into higher pay levels The outcome of contract negotiations with any unions representing the production staf Unfavourable labour efficiency variance Some common reasons are as follows: Inexperienced workers Poorly motivated workers Old or faulty equipment Purchase of low quality or unsuitable direct materials Poor supervision Insufficient demand for company’s product Frequent breakdowns Shortage of raw materials Just in time manufacturing system