Question

The following information is for the standard and actual costs for the Happy Corporation.

Standard Costs:
Budgeted units of production - 16,000 (80% of capacity)
Standard labor hours per unit - 4
Standard labor rate - $26 per hour
Standard material per unit - 8 lbs.
Standard material cost - $ 12 per pound
Standard variable overhead rate - $15 per labor hour
Budgeted fixed overhead - $640,000
Fixed overhead rate is based on budgeted labor hours at 80% capacity.

Actual Cost:
Actual production - 16,500 units
Actual material purchased and used - 130,000 pounds
Actual total material cost - $1,600,000
Actual labor - 65,000 hours
Actual total labor costs - $1,700,000
Actual variable overhead - $1,000,000
Actual fixed overhead - $640,000
Actual variable overhead - $1,000,000

Determine: (a) the quantity variance, price variance, and total direct materials cost variance; (b) the time variance, rate variance, and total direct labor costvariance; and (c) the volume variance, controllable variance, and total factory overhead cost variance.

Answer 1

(a)

Calculate the quantity variance as shown below:

Quantity variance = Standard price $\times$ (Actual quantity - Standard quantity)

$$\begin{aligned} &=\$ 12 \times(130,000 \text { pounds }-(16,000 \text { units } \times 8 \text { pounds })) \\ &=\$ 12 \times(130,000 \text { pounds }-128,000 \text { pounds }) \\ &=\$ 24,000(\mathrm{U}) \end{aligned}$$

Thus, the quantity variance is $\$ 24,000(\mathrm{U})$.

Calculate the price variance as shown below:

$$\begin{aligned} \text { Price variance } &=\text { Actual quantity } \times(\text { Actual price }-\text { Standard price }) \\ &=130,000 \text { pounds } \times(\$ 12.30-\$ 12) \\ &=\$ 40,000(\mathrm{U}) \end{aligned}$$

Thus, the price variance is $\$ 40,000(\mathrm{U})$.

$\underline{\text { Note: }}$

Calculate actual price per pound as shown below:

$$\begin{aligned} \text { Actual price per pound } &=\frac{\text { Total actual material cost }}{\text { Material purchased (in pounds) }} \\ &=\frac{\$ 1,600,000}{130,000 \text { pounds }} \end{aligned}$$

$=\$ 12.30$ per pound

Calculate the material cost variance as shown below:

Material cost variance $=$ Actual price $\times$ Actual quantity - Standard price $\times$ Standard Quantity

$$\begin{aligned} &=\$ 12.30 \times 130,000 \text { pounds }-\$ 12 \times(16,000 \text { units } \times 8 \text { pounds }) \\ &=\$ 1,600,000-\$ 1,536,000 \\ &=\$ 64,000(\mathrm{U}) \end{aligned}$$

Thus, the material cost variance is $\$ 64,000(\mathrm{U})$.

(b)

Calculate the time variance as shown below:

Time variance $=$ Standard rate $\times$ (Actual hours - Standard hours)

$$\begin{aligned} &=\$ 26 \times(65,000 \text { hours }-(16,000 \text { units } \times 4 \text { hours })) \\ &=\$ 26 \times 1,000 \text { hours } \\ &=\$ 26,000(\mathrm{U}) \end{aligned}$$

Thus, the time variance is $\$ 26,000(\mathrm{U})$.

Calculate the rate variance as shown below:

Rate variance $=$ Actual hours $\times$ (Actual rate - Standard rate)

$$\begin{aligned} &=65,000 \text { hours } \times(\$ 26.15-\$ 26) \\ &=\$ 10,000(\mathrm{U}) \end{aligned}$$

Thus, the rate variance is $\$ 10,000(\mathrm{U})$.

Note:

Calculate the actual rate as shown below:

Actual rate per

$$\begin{aligned} &=\frac{\$ 1,700,000}{65,000 \text { hours }} \\ &=\$ 26.15 \text { per hour } \end{aligned}$$

Calculate the labor cost variance as shown below:

Labor cost variance $=$ Actual hours $\times$ Actual rate - Standard hours $\times$ Standard rate $=65,000$ hours $\times \$ 26.15-(16,000$ units $\times 4$ hours $\times \$ 26)$

$$\begin{aligned} &=\$ 1,700,000-\$ 16,64,000 \\ &=\$ 36,000(\mathrm{U}) \end{aligned}$$

Thus, the labor cost variance is $\$ 36,000(\mathrm{U})$.