Question

1. Rain Gear, Inc., produces rain jackets. The master budget shows the following standards information and indicates the company expected to produce and sell 28,000 units for the year. Variable manufacturing overhead is allocated based on direct labor hours.

Direct materials	4 yards per unit at $3 per yard
Direct labor	2 hours per unit at $10 per hour
Variable mfg OH	2 direct labor hours per unit at $4 per hour

Rain Gear actually produced and sold 30,000 units for the year. During the year, the company purchased and used 130,000 yards of material for $429,000. A total of 65,000 labor hours were worked during the year at a cost of $637,000. Variable overhead costs totaled $231,000 for the year.

1. Company policy is to investigate all variances greater than 10 percent of the flexible budget amount for each of the three variable production costs: direct materials, direct labor, and variable overhead. Identify which of the six variances calculated in requirements bthrough eshould be investigated.

2. Provide two possible explanations for each variance identified in requirement e.

Answer 1

Answer to part(a)

We should calculate variance based of flexible budget, i.e., taking budgeted sales of actual quantity as base, following is the calculation:

Statement showing summary data Variance
	Budget qty	Budgeted on actual sales qty	Actual qty	Variance
	28000	30000	30000
Direct material
Yards of material	112000(4*28000)	120000(4*30000)	130000
Rate per yard	3	3	3.3 (429000/130000)
Total Cost	336000(112000*3)	360000(120000*3)	429000	19.2%
Direct labor
Labor hours	56000(28000*2)	60000(30000*2)	65000
Rate per hour	10	10	9.8(637000/65000)
Total cost	560000(56000*10)	600000(60000*10)	637000	6.2%
Variable overhead cost	224000(28000*2*4)	240000(30000*2*4)	231000	-3.8%

Since company's policy is to investigate variance greater than 10% of flexible budgets, we should look into variances related to direct material.

Statement showing calculation of Material Variance
Direct Material Total variance	=Standard cost- Actual cost
	=336000-429000
	=-93000
Direct Material Price Variance	=Standard cost of Actual quantity- Actual cost
	=360000-429000
	=-69000
Direct Material Usage Variance	=(Standard quantity- Actual quantity)*Standard price
	=(120000-130000)*3.3
	=-33000
Direct Material Mix Variance	=Total Actual qty*(budgeted price-actual price)
	=30000*(3-3.3)
	-9000
Direct Material yield Variance	=(Total budgeted qty-budgeted qty for actual units)*Budgeted price
	=(112000-120000)*3
	-24000
Direct Material purchase price Variance	=(Budgeted price- Actual price)* Actual quantity
	=(3-3.3)*130000
	-39000

Answer to part (b)

Direct Material Total variance	1. Quantity produced (30000) is more than quantity budgeted(28000)
	2. Actual raw material quantity (130000) is more than budgeted quantity for actual production (120000)
Direct Material Price Variance	1. Actual price per quantity (3.3) is more than budgeted price (3)
	2. Actual raw material quantity (130000) is more than budgeted quantity for actual production (120000)
Direct Material Usage Variance	1. Actual raw material quantity (130000) is more than budgeted quantity for actual production (120000)
Direct Material Mix Variance	1. Actual price per quantity (3.3) is more than budgeted price (3)
Direct Material yield Variance	1. Budgeted Qty for actual units (120000) is higher than budgeted qty for budgeted units
Direct Material purchase price Variance	1. Purchase price of raw material is higher than budgeted