Question

Paynesville Corporation manufactures and sells a preservative used in food and drug manufacturing. The company carries no inventories. The master budget calls for the company to manufacture and sell 116,000 liters at a budgeted price of $195 per liter this year. The standard direct cost sheet for one liter of the preservative follows. Direct materials (2 pounds @ $12) $ 24 Direct labor (0.5 hours @ $40) 20 Variable overhead is applied based on direct labor hours. The variable overhead rate is $100 per direct-labor hour. The fixed overhead rate (at the master budget level of activity) is $50 per unit. All non-manufacturing costs are fixed and are budgeted at $2 million for the coming year. At the end of the year, the costs analyst reported that the sales activity variance for the year was $606,000 unfavorable. The following is the actual income statement (in thousands of dollars) for the year. Sales revenue $ 21,718 Less variable costs Direct materials 2,368 Direct labor 2,210 Variable overhead 5,230 Total variable costs $ 9,808 Contribution margin $ 11,910 Less fixed costs Fixed manufacturing overhead 1,130 Non-manufacturing costs 1,310 Total fixed costs $ 2,440 Operating profit $ 9,470 During the year, the company purchased 192,000 pounds of material and employed 48,400 hours of direct labor. Required: a. Compute the direct material price and efficiency variances. b. Compute the direct labor price and efficiency variances. c. Compute the variable overhead price and efficiency variances. (For all requirements, enter your answers in whole dollars. Indicate the effect of each variance by selecting "F" for favorable, or "U" for unfavorable. If there is no effect, do not select either option.)

Answer 1

Budgeted contribution margin per unit = Selling price - Variable cost per unit

= $195 - ($24 + $20 + $100*0.5) = $101 per unit

Actual units sold = Budgeted sales units - Unfavorable sales activity variance / Budgeted contribution margin per unit

= 116000 - ($606,000 / $101)

= 110000 liters

Solution (a)
Direct material cost variance
AQ (ACTUAL QUANTITY)	192000
AP (ACTUAL PRICE)	12.33333333333330
SQ (STANDARD QUANTITY)	220000	2	110000
SP (STANDARD PRICE)	12
Direct material price variance
(AQ*SP)-(AQ*AP)	-64000	UNFAVORABLE
Direct Material Quantity Variance
(SQ*SP)-(AQ*SP)	336000	UNFAVORABLE
Direct Material Cost Variance
[(AQ*SP)-(AQ*AP)] + [(SQ*SP) - (AQ*SP)]	272000	UNFAVORABLE

Solution (b)
Direct Labor Cost Variance
AH (ACTUAL HOURS)	48400
AR (ACTUAL RATE)	45.66115702
SH (STANDARD HOURS)	55000	0.5	110000
SR (STANDARD RATE)	40
Direct Labor Rate variance
(AH*SR)-(AH*AR)	-274000	UNFAVORABLE
Direct Labor Efficiency variance
(SH*SR)-(AH*SR)	264000	FAVORABLE
Total direct labor cost variance
[(AH*SR)-(AH*AR)]+[(SH*SR)-(AH*SR)]	-10000	FAVORABLE

Solution (c)
AH (ACTUAL HOURS)	48400
AR (ACTUAL RATE)	108.0578512
SH (STANDARD HOURS)	55000	0.5	110000
SR (STANDARD RATE)	$                               100
Variable Overhead Price variance
(AH*SR)-(AH*AR)	-390000	UNFAVORABLE
Variable Overhead Efficiency variance
(SH*SR)-(AH*SR)	660000	FAVORABLE
Total Variable Overhead Cost variance
[(AH*SR)-(AH*AR)]+[(SH*SR)-(AH*SR)]	270000	FAVORABLE

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