Lexi Belcher picked up the monthly report that Irvin Santamaria left on her desk

Question

Lexi Belcher picked up the monthly report that Irvin Santamaria left on her desk. She smiled as her eyes went straight to the bottom line of the report and saw the favorable variance for operating income, confirming her decision to push the workers to get those last 290 cases off the production line before the end of the month. But as she glanced over the rest of numbers, Lexi couldn’t help but wonder if there were errors in some of the line items. She was puzzled at how most of the operating expenses could be higher than the budget since she had worked hard to manage the production line to improve efficiency and reduce costs. Yet the report, shown below, showed a different story.

Lexi picked up the phone and called Irvin. “Irvin, I don’t get it. We beat the budgeted operating income for the month, but look at all the unfavorable variances on the operating costs. Can you help me understand what’s going on?” “Let me look into it and I’ll get back to you,” Irvin replied.

Irvin gathered the following additional information about the month’s performance.

Machine hours used: 40,786

Irvin also found the standard cost card for a case of product.

Calculate the direct material price variance and direct material quantity variance for the month.

Calculate the direct labor rate variance and direct labor efficiency variance for the month.

Calculate the variable overhead spending variance and variable overhead efficiency variance for the month.

Calculate the fixed overhead spending variance for the month.

Prepare a performance report that will assist Lexi in evaluating her efforts to control production costs.

Based on your review of the performance report you prepared, do you think Lexi did a good job of controlling production expenses during the month?

Direct materials purchased: 101,592 pounds at a total of $558,756 Direct materials used: 101,592 pounds Direct labor hours worked: 26,394 at a total cost of $266,579

Machine hours used: 40,786

Irvin also found the standard cost card for a case of product.

Calculate the direct material price variance and direct material quantity variance for the month.

Calculate the direct labor rate variance and direct labor efficiency variance for the month.

Calculate the variable overhead spending variance and variable overhead efficiency variance for the month.

Calculate the fixed overhead spending variance for the month.

Prepare a performance report that will assist Lexi in evaluating her efforts to control production costs.

Based on your review of the performance report you prepared, do you think Lexi did a good job of controlling production expenses during the month?

Actual Budget 9,960 $1,862,500 Variance Cases produced and sold Sales revenue Less variable expenses 10,250 290 Favorable $1,939,700 $77,200 Favorable Direct material Direct labor Variable manufacturing overhead Variable selling expenses Variable administrative expenses 558,756 266,579 283,872 92,757 41,573 1,243,537 696,163 547,800 258,960 278,880 89,640 39,840 1,215,120 647,380 10,956 Unfavorable 7,619 Unfavorable 4,992 Unfavorable 3,117 Unfavorable 1,733 Unfavorable 28,417 Unfavorable Total variable expense Contribution margin Less fixed expenses 48,783 Favorable Fixed manufacturing overhead Fixed selling expenses Fixed administrative expenses 110,556 69,222 129,281 309,059 $387,104 109,560 69,720 129,480 308,760 $338,620 996 Unfavorable (498 Favorable) (199 Favorable) Total fixed expense 299 Unfavorable Operating income $48,484 Favorable

Explanation / Answer

1. Direct Material Price Variance

Direct Material Price Variance = (Standard Rate - Actual Rate) * Actual Quantity

Direct Material Price Variance = Standard Rate * Actual Quantity - Actual Rate * Actual Quantity

Direct Material Price Variance = 5.50 * 101592 - $558756

Direct Material Price Variance = $0 (No Variance)

2. Direct Material Quantity Variance

Direct Material Quantity Variance = Standard Quantity * Standard Rate - Actual Quantity * Standard Rate

Direct Material Quantity Variance = 102500 * 5.50 - 101592 * 5.50

Direct Material Quantity Variance = $4994 (Favorable)

3. Direct Labor Rate Variance = Standard Rate * Actual Hours - Actual Rate * Actual Hours

Direct Labor Rate Variance = $10 * 26394 - 266579

Direct Labor Rate Variance = $2639 (Unfavorable)

4. Direct labor Efficiency Variance = Standard Hours * Standard rate - Actual Hours * Standard Rate

Direct labor Efficiency Variance = 2.59 *10250 * 10 - 26394 * 10

Direct labor Efficiency Variance = $1535 (Favorable)

5. Variable Overhead spending Variance

Variable Overhead spending Variance = Standard Rate * Actual Hours - Actual Rate * Actual Hours

Variable Overhead spending Variance = 7 * 40786 - 6.96 * 40786

Variable Overhead spending Variance = $1630 (Favorable)

6.Variable Overhead Efficiency Variance

Variable Overhead Efficiency Variance = Standard Hour * Standard Rate - Actual Hour * Standard Rate

Variable Overhead Efficiency Variance = 41000 * 7 - 40786* 7

Variable Overhead Efficiency Variance = $1498 (Favorable)

7. Fixed Overhead spending Variance

Fixed Overhead spending Variance = Budgeted Fixed Expenses - Actual Fixed Expenses

Fixed Overhead spending Variance = 309059 - 308760

Fixed Overhead spending Variance = $299 (Favorable)

8. Fixed Overhead Efficiency Variance

Fixed Overhead Efficiency Variance = = (standard production hours - actual production hours) x Standard Rate

Fixed Overhead Efficiency Variance = = (41000 - 40786) x 2.74

Fixed Overhead Efficiency Variance = $586.36 (Favorable)

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