Question

Emerson Company produces ceramic teapots. Emerson allocates overhead based on the number of direct labor hours. The company is considering using a standard cost system and has developed the following standards (a batch is 100 teapots).

Standard Costs:                   

Direct Material                                   60 lbs. per batch          $ 5.00 per lb.   

Direct Labor                                        3.0 hr. per batch          $17.00 per hr.

Variable Manufacturing Overhead     3.0 hr.                          $7.00 per hr.

Fixed Manufacturing Overhead          3.0 hr.                          $3.00 per hr.   

2018 Budgeted Data for February:

Budgeted production, 121 batches (100 teapots each batch)

Denominator Hours, 363 DLH. (Emerson applies overhead on the basis of direct labor hours.)

Budgeted variable overhead, $2,541

Budgeted fixed overhead, $1,089.

2018 Actual Results for February:               

Direct material purchases were 4,500 lbs. at a cost of $4.70 per lb.

Direct material used was 4,100 lbs.

Direct labor costs was $3,344 at an average direct labor cost per hour of $17.60.

Total variable manufacturing overhead was $1,406.

Total fixed manufacturing overhead was $1,490.

Actual production was 60 batches.

1.a) Material price variance = (Standard price – Actual price) x Actual quantity
=> ($5.00 - $4.70) x 4,500 = $1,350 (Favorable)

Quantity variance = (Actual quantity used - Standard quantity used) x Standard cost
=> (4,100 – 3,600) x $5.00 = $2,500 (Unfavorable)

Standard quantity used = Actual production x Standard Direct Material per batch
=> 60 batches x 60 lbs per batch = 3,600 lbs

1.b) Labor rate variance = (Actual rate per labor hour - Standard rate per labor hour) × Actual Hours
=> ($17.60 - $17) x ($3,344/$17.60) = $114 (Unfavorable)

Labor efficiency variance = (Actual hours × Standard rate) – (Standard hours × Standard rate)
=> (190 x $17) – (180 x $17) = $170 (Unfavorable)

Standard hours = Total batches manufactured x Standard labor hours per batch
=> 60 x 3 = 180

1.c) Variable overhead rate(spending) variance = (Standard variable overhead rate – Actual variable overhead rate) × Actual Units
=> ($7 - $7.81) x 60 = -$48.67 (Unfavorable)

Variable overhead efficiency variance = Standard overhead rate x (Actual hours - Standard hours)
=> $7 x (190 – 180) = $70 (Unfavorable)

1.d) Fixed overhead budget variance = Actual fixed overhead - Budgeted fixed overhead
=> $1,490 - $1,089 = $401 (Unfavorable)

Fixed Overhead Volume Variance = Applied Fixed Overhead – Budgeted Fixed Overhead
=> $540 - $1,089 = -$549 (Unfavorable)

Applied Fixed Overhead = (Budgeted Fixed Overhead/Budgeted Units) x Actual units produced
=> ($1,089/121) x 60 = 540

Computation of Direct Material Price & Quantity Variance						Journal Entry
Direct Material Price Price variance	(SP-AP)AQ	($5-$4.70)*4500	$1,350	favourable		Particular	Debit	Credit
Direc Material Quantity Variance	(SQ-AQ)SP	(3600-4100)*5	($2,500)	Unfavourable		Material Price Variance
						Material Control A/c ($5*4500)	$22,500
Computation of Direct Labour Rate & Efficiency Variance						To Material Price Variance		$1,350
Direct Labour Rate variance	(SR-AR)*AH	($17-$17.60)*($3344/$17.60)	($114)	Un Favourable		To Creditor ($4.70*4500)		$21,150
Direct Labour Efficiency Variance	(SH-AH)SR	(180-190)*$17	($170)	Un Favourable
						Material Quantity Variance
						WIP (3600*$5)	$18,000
						Material Usage Variance	$2,500
						To Material Control A/c (4100*$5)		$20,500
						Labour Rate Variance
						Labour Control A/c ($17*190)	$3,230
						Labour Rate Variance	$114
						To Labour Payable A/c ($17.60*190)		$3,344
						Labour Efficiency Variance
						WIP (180*$17)	$3,060
						Labour Efficiency Variance	$170
						To Labour Control A/c (190*$17)		$3,230

3.         EXTRA CREDIT: (Worth 6 pts.) Answer the following questions:

a. Have the company’s managers done a good job or a poor job controlling materials, labor, and overhead costs? Why or why not?

b. What do you think may have caused the variances to be favorable or unfavorable? Give 2 examples for each variance you have calculated above.

c. Describe how the company’s managers can benefit from the standard costing system. Do you think the company should continue with the standard cost system? Why or why not?

Answer 1

3 a.

.i) Controlling Material cost: NO

Actual material usage was higher than standard, though the purchase price was slightly lower than standard.

Though price variance was favourable, overall material cost variance was unfavourable due to high unfavourable material quantity variance

.ii) Controlling Cost of labor: NO

Both the rate variance and efficiency variance were unfavourable

.iii) Controlling cost of overheads: NO

Variable as well as fixed overhead variances were unfavourable

Hence , it can be concluded that company mangers did a poor job in controlling costs.

.2

Materials:The purchase was made at lower price. It is possible that the purchase manager did compromise on the quality of the material which led to higher material consumption leading to unfavourable variances

Labor:

Labor rate might have gone up after the standards were prepared.

The estimate of labor hour required may be lower. It will need to revise the standard

Overheads:

Variable overhead efficiency variance is due to higher labor hours used.

Fixed overhead variance of $401(Unfavourable) may be due to some unforeseen overhead expense like maintenance during the period

.C Standard costing system is very helpful to the managers.

It helps in preparaing budgets, planning and controlling activities and communicating results.

It also helps in performance appraisal of managers.

The company should continue with the standard costing system