Question

Preble Company manufactures one product. Its variable manufacturing overhead is applied to production based on direct labor-hours and its standard cost card per unit is as follows

Direct material: 5 pounds at $9.00 per pound	$	45.00
Direct labor: 3 hours at $14 per hour		42.00
Variable overhead: 3 hours at $8 per hour		24.00
Total standard variable cost per unit	$	111.00

The company also established the following cost formulas for its selling expenses:

	Fixed Cost per Month				Variable Cost per Unit Sold
Advertising	$	340,000
Sales salaries and commissions	$	380,000			$	26.00
Shipping expenses					$	17.00

The planning budget for March was based on producing and selling 28,000 units. However, during March the company actually produced and sold 34,000 units and incurred the following costs:

1. Purchased 180,000 pounds of raw materials at a cost of $8.50 per pound. All of this material was used in production.

2. Direct-laborers worked 69,000 hours at a rate of $15.00 per hour.

3. Total variable manufacturing overhead for the month was $565,110.

4. Total advertising, sales salaries and commissions, and shipping expenses were $345,000, $525,000, and $255,000, respectively.

Required:

1a. What raw materials cost would be included in the company’s flexible budget for March?

1b. What is the materials quantity variance for March? (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance.). Input the amount as a positive value.)

1c. What is the materials price variance for March? (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance.). Input the amount as a positive value.)

1d. If Preble had purchased 184,000 pounds of materials at $8.50 per pound and used 180,000 pounds in production, what would be the materials quantity variance for March? (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance.). Input the amount as a positive value.)

1e. If Preble had purchased 184,000 pounds of materials at $8.50 per pound and used 180,000 pounds in production, what would be the materials price variance for March? (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance.). Input the amount as a positive value.)

Answer 1

1a. Raw materials cost included in the company’s flexible budget for March

Raw materials cost = Production Units * Pounds of Material Required * Standard Cost

Raw materials cost = 34000 * 5 * $9

Raw materials cost = $1530000

1b. Materials quantity variance for March

Materials quantity variance = ( SQ − AQ ) × SP

SQ is the standard quantity allowed

AQ is the actual quantity of direct material used

SP is the standard price per unit of direct material

Materials quantity variance = ( 34000 * 5 − 180000 ) × $9

Materials quantity variance = $90000 (Unfavorable)

1c. Materials price variance for March

Materials price variance = ( SP − AP ) × AQ

AQ is the actual quantity of direct material used

SP is the standard unit price of direct material

AP is the actual price per unit of direct material

Materials price variance = ( $9 − $8.50) × 180000

Materials price variance = $90000 Favorable

1d. Materials quantity variance for March if difference in purchase and usage

Materials quantity variance = ( SQ − AQ ) × SP

SQ is the standard quantity allowed

AQ is the actual quantity of direct material used

SP is the standard price per unit of direct material

Materials quantity variance = ( 34000 * 5 − 180000 ) × $9

Materials quantity variance = $90000 (Unfavorable)

There will be no change in Material quantity variance and it will be same as $90000 Unfavorable

1e. Materials price variance for March if difference in purchase and usage

Materials price variance = ( SP − AP ) × AQ

AQ is the actual quantity of direct material Purchased

SP is the standard unit price of direct material

AP is the actual price per unit of direct material

Materials price variance = ( $9 − $8.50) × 184000

Materials price variance = $92000 Favorable