In: Accounting
The accountants at Value Vases developed the following standards for producing exquisite vases from a liquid silicate:
Direct materials 2.5 gallons @ $5 per gallon
Direct labor 3.5 hours @ $15 per hour
Variable overhead $10.00 per direct labor hour
Fixed overhead $5.00 per direct labor hour
Value’s volume of direct labor hours for normal costing is 1,680 each month. In a recent month, Value produced 500 vases and incurred the following costs:
Direct materials purchased & used 1,200 gallons @ $6 per gallon
Direct labor 1,700 hours @ $14 per hour
Variable overhead $15,000
Fixed overhead $8,500
a. Calculate the following eight variances.
Variable overhead spending variance
Variable overhead efficiency variance
Fixed overhead spending variance
Fixed overhead production volume variance
b. Suggest one possible cause for each of the following variances calculated in part (a):
Direct material price variance
Direct labor efficiency variance
Fixed overhead spending variance
(A) Variable overhead efficiency variance : $17000 - $17500 = $500F
Variable overhead price variance : $17000 - $15000 = $2000F
Fixed overhead spending variance : $8400 - $8500 = $100U
Fixed overhead volume variance : $8400 - $8750 = $350F
(B) Below are possible causes for the four variance :
1. Direct material price variance : TBR may have purchased higher quality raw materials, or vendors might have increased their prices.
2. Direct labour efficency variance : TBR may have used fewer hours than normal because of higher quality materials, or process improvements might have caused labour hours to be reduced.
3. Fixed overhead spending variance : An unexpected increase might have occurred in rent, utilities, or some other costs.