Question

The Justice Corporation mass produces wooden chairs. The standard costs follow:

Plastic                                                  10 pounds at $4.50 per pound.

Molding                                                         3 feet at $3.00 per foot.

Direct labor                                              4 hours at $15.00 per hour.

Variable overhead                                         $3 per direct labor hour.

Fixed overhead                                          $.75 per direct labor hour.

                                  The static budget called for 80,000 direct labor hours in June.

Transactions during June follow:

• Justice purchased 200,000 pounds of plastic at $ 4.45 and issued 185,000 pounds to production.
• Justice purchased 60,000 feet of molding at $3.10 per foot and issued 50,000 feet to production.
• The direct labor payroll was 72,500 hours at $14.50.
• Overhead costs were $275,000 of which $221,125 was variable.
• Justice produced 18,000 chairs during the month.

                  Required:

1. Compute the direct materials, direct labor, variable overhead, and fixed overhead variances that were discussed in class.
2. Discuss the significance of the variances.

Answer 1

a. Direct Materials Variances:

Plastic:

Direct materials price variance = ( Standard price per unit - Actual price ) x Quantity purchased = $ ( 4.50 - 4.45 ) x 200,000 = $ 10,000 F

Direct materials quantity variance = ( Standard quantity allowed for actual output - Actual quantity used ) x Standard price per unit = ( 10 lbs. x 18,000 - 185,000) x $ 4.50 = $ 22,500 U

Molding:

Direct materials price variance = $ ( 3.00 - 3.10) x 60,000 = $ 6,000 U

Direct materials quantity variance = ( 3 ft. x 18,000 - 50,000) x $ 3.00 = $ 12,000 F.

Direct Labor Variances:

Direct labor rate variance = $ ( 15.00 - 14.50) x 72,500 = $ 36,250 F

Direct labor efficiency variance = ( 4 hrs x 18,000 - 72,500) x $ 15.00 = $ 7,500 U

Variable Overhead Variances:

Variable overhead rate variance = $ ( 3.00 - 3.05 ) x 72,500 = $ 3,625 U

Variable overhead efficiency variance = ( 3 hrs. x 18,000 - 72,500) x $ 3.00 = $ 1,500 U

Fixed Overhead Variances:

Budgeted fixed overhead = 80,000 labor hours x $ 0.75 = $ 60,000.

Actual fixed overhead = $ 275,000 - $ 221,125 = $ 53,875

Standard fixed overhead = 18,000 units x 4 hours x $ 0.75 = $ 54,000.

Fixed overhead budget variance = $ 60,000 - $ 53,875 = $ 6,125 F

Fixed overhead volume variance = $ 60,000 - $ 54,000 = $ 6,000 F

Fixed overhead spending variance = $ 54,000 - $ 53,875 = $ 125 F