Standard Costs: Budgeted units of production-16,000(80%of capacity) Standard lab

Question

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 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, & total direct materials cost variance and (b) the time variance, rate variance, & total direct labor cost variance

Explanation / Answer

Here's a trick to remember the variance formulas: They all involve standard price (SP), standard quantity (SQ), actual price (AP), and actual quantity (AQ).

Quantity Variance: SPxAQ - SPxSQ, or SPx(AQ-SQ). We're looking for the variance due to quantity, so we use the standard price times the difference in quantity.

Price Variance: SPxAQ - AQxAP, or AQx(SP-AP). We're looking for the variance due to price, so we use the actual quantity times the difference in prices.

Both of these formulas include SPxAQ: SPit in the AQuarium. This will help you to remember which numbers to multiply.

Total Variance is simply APxAQ - SPxSQ, which is also the sum of the quantity variance and price variance.

Remember that these are just absolute values, positive/negative doesn't matter -- have to determine Favorable or Unfavorable. It is unfavorable for the actual cost to exceed the standard cost.

Now let's work the problem:
a. Direct Materials variance
QV: SPxAQ - SPxSQ.
($12/lb x 130,000 lbs) - ($12/lb x 8lbs/unit x 16,000 units) = $24,000
this is $24,000 UNFAVORABLE because the actual exceeds the standard.

PV: SPxAQ - APxAQ
In this case, the actual material cost is given and it is $1,600,000.
($12/lb x 130,000 lbs) - ($1,600,000) = $40,000
this is $40,000 UNFAVORABLE because the actual exceeds the standard.

Total DM Var: APxAQ - SPxSQ.
($1,600,000) - ($12/lb x 8lbs/unit x 16,000 units) = $64,000 UNFAVORABLE.
To confirm: this is the sum of the two variances above, 24K + 40K = 64K.

b. Direct Labor Variance

Time Variance: SPxAQ - SPxSQ
($26/hr x 65,000 hours) - ($26/hr x 4 hrs/unit x 16,000 units) = $26,000
This is $26,000 UNFAVORABLE because actual time exceeded standard time.

Rate Variance: SPxAQ - APxAQ
Actual labor cost is given, $1,700,000.
($26/hr x 65,000 hours) - ($1,700,000) = $10,000
This is $10,000 UNFAVORABLE because actual cost exceeded standard cost.

Total DL variance: APxAQ - SPxSQ
($1,700,000) - ($26/hr x 4 hrs/unit x 16,000 units) = $36,000 UNFAVORABLE.
Again, to double check our work, we confirm that 10K + 26K = 36K. Good.

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