Question

CONTROL LIMITS, VARIANCE INVESTIGATION

Goodsmell Company produces a well-known cologne. The standard manufacturing cost of the cologne is described by the following standard cost sheet:

Direct materials:

Liquids (4.2 decilitres @ $0.25)     $1.05

Bottles (1 @ $0.05)                          0.05

Direct labour (0.2 hr. @ $12.50)                2.50

Variable overhead (0.2 hr. @ $4.70)        0.94

Fixed overhead (0.2 hr. @ $1.00)             0.20

Standard cost per unit                                $4.74

Management has decided to investigate only those variances that exceed the lesser of 10 percent of the standard cost for each category or $20,000.

During the past quarter, 250,000 four decilitre bottles of cologne were produced.

Descriptions of actual activity for the quarter follow:

A total of 1.15 million decilitres of liquids was purchased, mixed, and processed. Evaporation was higher than expected (no inventories of liquids are maintained).

The price paid per decilitre averaged $0.27.

Exactly 250,000 bottles were used. The price paid for each bottle was $0.048.

Direct labour hours totalled 48,250, with a total cost of $622,425.

Normal production volume for Goodsmell is 250,000 bottles per quarter. The standard overhead rates are computed by using normal volume. All overhead-costs are incurred uniformly throughout the year.

Required:

Calculate the upper and lower control limits for each manufacturing cost category.

Compute the total materials variance, and break it into price and usage variances. Would these variances be investigated?

Compute the total labour variance, and break it into rate and efficiency variances. Would these variances be investigated?

Answer 1

Part A. - Calculation of Upper And Lower Limits for Manufacturing Cost Category.

Step 1 - Direct Material (Liquid)

Total Standard Cost = $1.05 Per Bottle * 250000 Bottle = $262500

Control Limit = Lesser of 10% of standard cost or $20000

Upper control Limit = ($262500 + 10%) = $288750 or ($262500+20000) =$282500.

Upper control limit is $282500 (lesser)

Lower Control limit = ($262500 - 10%) = $236250 or ($262500-$20000) = $242500

Lower control limit is $242500 (Greater)

Step 2 - Direct Material (Bottle)

Total Standard cost = $0.05 Per bottle * 250000 bottle = $12500

Flat limit of $20000 can not be applied since total cost is less than $20000

Upper Limit = ($12500 + 10%) = $13750.

Lower Limit = ($12500 - 10%) = $11250

Step 3 - Total Direct Labour cost

Total Standard Cost = ($2.5 Per bottle * 250000 bottle) = $625000

Upper Limit = ($625000 + 10%) = $687500 or ($625000 + $20000) = $645000

Upper limit = $64500 (lesser)

Lower Limit = ($625000 - 10%) = $562500 or ($625000 - $20000) = $605000

Lower Limits = $605000 (Greater)

Part B. Material Variances

Material Chart for Litres

Particulars	Standard budget (250000 bottles)	Actual Data (250000 bottles)
Price per Bottle	$1.05 ($0.25*4.2)	$1.242 ($0.27*4.6)
Total Litre used	1050000 Litre (4.2 Litre * 250000)	1150000 Litre
Litre used per bottle	4.2 Litre	4.6 Litre (1150000/250000)
Total Litre cost	$262500 (250000 * $1.05	$310500 (250000 * $1.242)

Total Material cost variance (Litre)

Total Material Cost variance = Standard Cost - Actual cost Standard Cost = $262500 Actual cost = $310500 Material cost Variance = ($262500 - $310500) = $48000 U It will be investigated as it exceed $20000

Total Material Price Variance (Litre)

Material Price Variance = (Standard Price - Actual Price)*Actual Litres = ($0.25 - $0.27)*1150000 Litres = $23000 U It will be investigated as it exceed $20000

Total Material Usage Variance (Litre)

Material Usage Variance = (Standard Usage - Actual Usage)*Standard Price = (1050000 - 1150000)*$0.25 = $25000 U It will be investigated as it exceed $20000

Material Chart Variance for Bottles

Particulars	Standard Data	Actual Data
Total Bottles used	250000 (250000*1)	250000
Price Per Bottle	$0.05	$0.048
Total Bottle Cost	$12500	$12000

Material cost variance (Bottle)

Material cost variance = ($12500 - $12000) = $500 F Investigation not Required since it is less than $20000

Material Price Variance (Bottle)

Material Price Variance = ($0.05 - $0.048)*250000 = $500 F Investigation not Required since it is less than $20000

Material Usage Variance (Bottle)

Material Usage variance = (250000 - 250000)*$0.05 = $0 Investigation not Required since it is less than $20000

Part C - Direct Labour Variances

Direct Labour Chart

Particulars	Standard Cost	Actual Dats
Total Hours used	50000 (250000 * 0.2 Hour)	48250
Rate per hour	$12.5	$12.9 ($622425/48250)
Total Labour cost	$625000	$622425

Direct Labour cost Variance

Labour cost Variance = (Standard Labour cost - Actual Labour cost) = ($625000 - $622425) = $2575 F Not Required To be investigates since it is less than $20000

Direct Labour Rate Variance

Labour Rate variance = (Standard Rate - Actual Rate)*Actual Hours = ($12.5 - $12.9)*48250 = $19300 U It will not be required to investigate since it is less than $20000

Direct Labour Efficiency Variance

Labour Efficiency Variance = (Standard Hours - Actual Hours)*Standard Rate = (50000 - 48250)*$12.5 = $21875 F It will be Investigated since it is more than $20000