Question

… has the following standard cost sheet for its main product:

Direct Materials			2 feet at	$5 per foot	$10
Direct Labor			0.5 hours at	$10 per hour	$5
Variable overhead			0.5 hours at	$2 per hour	$1
Fixed overhead			0.5 hours at	$4 per hour	$2
Standard overhead					18

The fixed and variable overhead rates were based on expected activity of 3,200 hours.

During the year, the following actual results were recorded:

Actual results for year:
Production						6,000 units
Direct materials purchases    11,750 feet purchased - 11,000 feet used						61,100
direct labor                              2,900 hours						29,580
variable overhead						6,000
fixed overhead						10, 500

REQUIRED:

1. Assuming that the company uses a 4-way overhead analysis, compute the following variances for Minnesota Manufacturing
2. Variable overhead spending and efficiency variances
3. Fixed overhead spending (budget) and volume variances
4. Show the journal entries needed to record the application of overhead, actual overhead, overhead variances and disposition of overhead variances under standard costing
5. Assuming that the company uses a 3-way overhead analysis, compute the spending, efficiency and volume variances.
6. Assuming that the company uses a 2-way overhead analysis, compute the budget variance and volume variance.
7. Compute the direct materials price and usage variances, and the direct labor rate and efficiency variances.
8. Record all related journal entries for above.
9. Compute all direct-cost variances and record journal entries for Standard Costing.

Answer 1

Where,

SR= Standard Rate

AR= Actual Rate

SH= Standared Hours

AH= Actual Hours

In the given Question for variable overhead,

SR= $1

AR= $(6000/(2900X0.5))

SH= 2900 Hours X 0.5 (3200Hours activity given in the question is budgeted Hours. Hence, Standared Hours for Actual Acticity Hours would be 2900 Hours)

AH= 2900 X 0.5 (Based on the Labour Hours)

Hence Variable Overhead Variaces will bw as follows,

Spending Variance = (SR - AR) X AH

=(2 - (6000/(2900X0.5)) X 2900 X0.5

= 2X1450 - (6000/14500)X1450

= 2900 - 6000

= $3100 (Adverse)

Efficiency Variance = (SH - AH) X SR

=((2900 X 0.5) - 1450) X 2

= 2X1450 - 1450X2

= 2900 - 2900

= Nill

Journal Entries would be as follows

Same formula can be used to calculate fixed overhead Spending and volume variance, where,

SR = $4

AR = $(10500/(2900X0.5))

SH = 1450 Hours (2900 X 0.5)

AH = 2900X0.5Hours

Spending Variance = (SR - AR) X AH

= (4 - (10500/(2900X0.5))) X 2900x0.5

= $4700 (Adverse)

Volume Variance = (SH - AH) X SR

=(1450 - 1450) X4

= Nill

Similar journal entries can be passed for fixed overhead also.

3-WAY Overhead Analysis

3- Way overhead analysis invovles break up of fixed overhead variance into-

• Spending Variance
• Volume Variance
• Efficiency Variance

Spending Variance = Difference between budgeted Overhead and Actual Overhead -> (BH X SR) - (AH X AR)

Volume Variance = Difference between Absorbed Overhead and Budgeted Overhead -> (SH X SR) - (BH X SR)

Efficiency Variance = (SH X SR) - (AH X SR)

As per the data given in the question,

BH = 3200 X 0.5 = 1600 Hours

Therefore,

• Spending Variance = (1600 X 4) - 10500

=$ 4100 (Adverse)

• Volume Variance = (1450 X 4) - (1600 X 4)

= $ 600 (Adverse)

• Efficiency Variance = (1450 - 1450) X4

  = Nill

2-WAY Overhead Analysis

2- Way overhead analysis invovles break up of fixed overhead variance into-

• Budgeted Variance
• Volume Variance

Budgeted Variance = Difference between budgeted Overhead and Actual Overhead -> (BH X SR) - (AH X AR)

Volume Variance = Difference between Absorbed Overhead and Budgeted Overhead -> (SH X SR) - (BH X SR)

Same as it has been calculated above.

Material Cost Variance

Material Price Variace = (SR-AR) X AQ

Material Usage Variance = (SQ-AQ) X SR

where,

SR = Standered Rate

AR = Actual Rate

SQ = Standered Quantity

AQ = Actual Quantity

In the given Question,

SR = $5

AR = $(61100/11000)

SQ = 2feet X 6000 units

AQ = 11000 feet

Material Price Variace = (SR-AR) X AQ

= (5-(61100/11000) X 11000

= $ 6100 (Adverse)

Material Usage Variance = (SQ-AQ) X SR

= (2X6000 - 11000) X 5

= $ 5000 (Favourable)

Labour Cost Variance

Labour Rate Variance = (AR-SR)XAH

Labour Efficiency Variance = (AH-SH)XSR

In the given question,

AR = $(29580/2900)

SR = $10

AH = 2900 X0.5 = 1450hours

SH = 2900 X 0.5 =1450 hours

Labour Cost variance can be calculated using the above given formula.

Journal entries for these variance can be passed in the same manner as it has been passed in the cae of variable overhead, as given earlier in the solution.