Question

Question : Variance Analysis

The following standard cost data relate to the operation of Dragon Company for 2016. The standard cost per unit is based on the normal annual production of 15,000 units.

Standard cost per unit
Direct materials	4kg @ $5.00 per kg		$   20.00
Direct labour	2hrs @ $12.50 per hr		$   25.00
Variable overhead	2hrs @ $3.00 per hr		$   6.00
Fixed overhead	2 labour hrs @ $5.00 per hr		$   10.00
Total			$   61.00

Actual production in 2016 was 10,000 units. The following data was obtained from Dragon Company’s records:

Direct material purchases		45,000	Kilograms
Cost of direct materials purchases		$   202,500
Actual direct labour hours		25,000	Hours
Actual direct labour costs		$   325,000
Actual variable overhead costs		$   100,000
Actual fixed overhead		$   125,000

Required:

3a. Calculate and show flexible budget variance for each cost item.
3b. Calculate the following variances and indicate whether they are favourable or unfavourable.

v.Variable manufacturing overhead spending variance

vi.Variable manufacturing overhead efficiency variance

vii.Fixed manufacturing overhead spending variance

viii.Fixed manufacturing overhead efficiency variance

Answer 1

Solution 3a:

Material Variance

Standard quantity of material for actual production = 10000*4 = 40000 Kg

Actual quantity of material = 45000 Kg

Standard price of material = $5 per kg

Actual price of material = $202,500 / 45000 = $4.50

Material price variance = (SP - AP) * AQ = ($5 - $4.50) * 45000 = $22,500 F

Material quantity variance = (SQ - AQ) * SR = (40000 - 45000) * $5 = $25,000 U

Material cost variance = Material price variance + Material quantity variance = $22,500 F + $25,000U

= $2,500 U

Labor Variances:

Standard hours of direct labor = 10000 * 2 = 20000 hours

Standard rate of direct labor = $12.50 per hour

Actual hours of direct labor = 25000 hours

Actual rate of direct labor = $325,000 / 25000 = $13 per hour

Direct labor rate variance = (SR - AR) * AH = ($12.50 - $13) * 25000 = $12,500 U

Direct labor efficiency variance = (SH - AH) * SR = (20000 - 25000) * $12.50 = $62,500 U

Direct labor cost variance = Direct labor rate variance + Direct labor efficiency variance = $12,500 U + $62,500 U = $75,000 U

Solution 3b:

Standard hours of direct labor = 10000 * 2 = 20000 hours

Standard rate of variable overhead = $3 per hour

Actual hours of direct labor = 25000 hours

Actual rate of variable overhead = $100,000 / 25000 = $4 per hour

Variable overhead spending variance = (SR - AR) * AH = ($3 - $4) * 25000 = $25,000 U

Variable overhead efficiency variance = (SH - AH) * SR = (20000 - 25000) * $3 = $15,000 U

Fixed overhead variance:

Budgeted fixed overhead = 15000 * 2 * $5 = $150,000

Actual fixed overhead = $125,000

Fixed overhead applied = 10000*2*$5 = $100,000

Fixed overhead spending variance = Budgeted fixed overhead - Actual fixed overhead = $150,000 - $125,000 = $25,000 F

Fixed overhead volume variance = Fixed overhead applied - Budgeted fixed overhead

= $100,000 - $150,000 = $50,000 U