Question

Question 3: Variance Analysis (20 marks in total) 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. i.Direct material price variance ii.Direct material efficiency variance iii.Direct labour price variance iv.Direct labour efficiency variance 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

1. Direct Material Price Variance

Direct Material Price Variance = Standard Cost of Actual Raw Material (less) Actual Cost of Raw Material

   = (45,000 * $5 per kg ) - ( $202,500 )

= $225,000 - $202,500

= $22,500 i.e. Favourable variance of $22,500.

2. Direct Material Efficiency Variance

Direct Material Efficiency Variance = Standard Material that should used in actual production (less) Actual Material used for actual production

= ( 10,000 units * 4 kg per unit ) - ( 45,000 kg )

= 40,000 - 45,000

= - 5000 i.e. Unfavourable efficiancy variance of 5000 kg.

3. Direct Labour Price Variance

  Direct Labour Price Variance = Standard labour cost that should occur for actual hours worked (less)

Actual labour cost occured

= ( 25000 hours * $12.50 per hour ) - ( $325,000)

= $ 312,500 - $ 325,000

= - $ 12,500 i.e Unfavourable variance of $ 12,500

4. Direct Labour Efficiency Variance

Direct Labour Efficiency Variance = Standard Labour Hours that should have occured (less) Actual Hours Occured

= ( 10,000 units * 2 hours per unit ) - ( 25000 )

= 20,000 hours - 25,000 hours

= - 5000 i.e Unfavourable variance of 5000 hours