Question

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