Question

Direct Materials, Direct Labor, and Factory Overhead Cost Variance Analysis 

Mackinaw Inc. processes a base chemical into plastic. Standard costs and actual costs for direct materials, direct labor, and factory overhead incurred for the manufacture of 74,000 units of product were as follows: 

	Standard Costs	Actual Costs
Direct materials	251,600 lbs. at $5.40	249,100 lbs. at $5.20
Direct labor	18,500 hrs. at $17.30	18,930 hrs. at $17.70
Factory overhead	Rates per direct labor hr.,
	based on 100% of normal
	capacity of 19,310 direct
	labor hrs.:
	Variable cost, $4.80	$87,910 variable cost
	Fixed cost, $7.60	$146,756 fixed cost

Each unit requires 0.25 hour of direct labor. 

Required: 

a. Determine the direct materials price variance, direct materials quantity variance, and total direct materials cost variance. Enter a favorable variance as a negative number using minus sign and an unfavorable variance as a positive number.

Direct Materials Price Variance

Direct Materials Quantity Variance

Total Direct Materials Cost Variance

b. Determine the direct labor rate variance, direct labor time variance, and total direct labor cost variance. Enter a favorable variance as a negative number using a minus sig and an unfavorable variance as a positive number.

Direct Labor Rate Variance

Direct Labor Time Variance

Total Direct Labor Cost Variance

c. Determine the variable factory overhead controllable variance, fixed factory overhead volume variance, and total factory overhead cost variance. Enter a favorable variance as a negative number using a minus sign and an unfavorable variance as a positive number.

 Variable factory overhead controllable variance 

 Fixed factory overhead volume variance 

 Total factory overhead cost variance

Answer 1

Variance analysis is a technical jargon to explain a situation where actual result differs from planned

or expected results. It is an act of comparing standards with actual. The study of variances help in

decision making and finding out the major areas which needs immediate attention.

MAckinaw Inc.

Variances

MPV = ( SP - AP ) * AQ purchased

MPV = ( 5.40 - 5.2 ) * 249100 = $ 49820 ( favourable )

MQV = ( SQ - AQ ) SP

MQV = ( 251600 - 249100 ) * 5.40 = $ 13500 ( favourable )

Total DM cost variance = MPV + MQV = 49820 + 13500 = 63320 ( favourable )

LRV = ( SR - AR ) AH

LRV = ( 17.3 - 17.7 ) 18930 = $ 7572 (UN- Favourable)

LEV = ( SH - AH ) SR

LEV = ( 18500 - 18930 ) 17.3 = $ 7439 ( unfavourable)

Total DL cost variance = LRV + LEV = 7572 + 7439 = 15011 ( unfavourable )

VOH controllable varaince = Standard cost allowed - Actual variable OH cost

74000 * 0.25 * 4.80 - 87910 = $ 890 ( favourable )

FOH Volume Variance = ( SH for Actual output - Budgeted hours ) * SR

( 74000 * 0.25 - 19310 ) * 7.60 = $ 6156 ( favourable )

Total factory OH cost variance = VOH controllable variance + FOH volume variance

890 + 6156 = 7046 ( favourable )