The Rio Company manufactures beach umbrellas and uses a standard cost system. An

Question

The Rio Company manufactures beach umbrellas and uses a standard cost system. An analysis of costs shows the direct material used in one umbrella costs $10.20. One hour of direct labor costs $12 with standard production being two umbrellas per hour. Variable manufacturing overhead is estimated at $4.50 per hour, and fixed overhead is set as $72,000 per year. Normal operating capacity is 120,000 umbrellas per year.

1.Determine the standard variable cost per umbrella based on the above information.

During the year 110,000 umbrellas were produced at the following costs:
Materials (114,000 units @ $10.50) $ 1,197,000
Labor (62,000 hours @ $11.80) 731,600
Variable overhead 285,200
Fixed overhead 72,000 (don’t need for these calcs)

2.Calculate the direct materials cost variances, the direct labor cost variances, and the variable overhead cost variances.

Explanation / Answer

1) According to the given information, Direct material cost per umbrella = $10.2 Direct labor cost per 2 umbrellas = $12 Direct material cost per 1 umbrella = $6 { Since the production is being made as 2 umbrellas per hour} Variable manufacturing overhead = $4.5 per hour Variable manufactuing ovehead = $2.25 per umbrella Calculating the standard variable cost per umbrella: Direct material cost + Direct labor cost + Variable manufacturing overhead $10.2 + $6 + $2.25 = $18.45 2) To calculate the direct material cost variance, we need to find out the material price variance and material quantity variance. Material price variance = AQ (AP - SP)                                    = 110,000 ($10.50 - $18.45)                                    = $874,500 F The material price variance is favourble because the actual price is less than the standard price. Material quantity variance = SP (AQ - SQ)                                        = $18.45 (110,000 - 120,000)                                        = $184,500 F The material quantity variance is favourble because the actual quantity is less than the standard quantity. Material cost variance = Price variance + Quantity variance                                   = $874,500 + $184,500                                   = $1,059,000 F Labor rate variance = AH (AR - SR)                               = 62,000 ($11.80 - $6)                              = $359,600 U The labor rate variance is unfavourable because the actual rate is more than the standard rate Labor efficiency variance = SR (AH - SH)                                       = $6 (62,000 - 55,000)                                       = $42,000 U The labor efficiency variance is unfavourable because the actual hours are more than the standard hours Labor cost variance = Rate variance + Efficiency variance                                = $401,600 U Variable overhead rate variance = AH (AR- SR)                                                  = 62,000 ($2.6 - $2.25)                                                  = $21,700 U Variable overhead rate variance is unfavourable becasue the actual rate is more than the standard rate Variable overhead efficiency variance = SR (AH - SH)                                                          = $2.25 (62,000 - 55,000)                                                          = $15,750 U Variable overhead efficiency variance is unfavourable becasue the actual hours are more than the standard hours Variable overhead cost variance = $21,700 + $15,750                                                  = $37,450 U The material quantity variance is favourble because the actual quantity is less than the standard quantity. Material cost variance = Price variance + Quantity variance                                   = $874,500 + $184,500                                   = $1,059,000 F Labor rate variance = AH (AR - SR)                               = 62,000 ($11.80 - $6)                              = $359,600 U The labor rate variance is unfavourable because the actual rate is more than the standard rate Labor efficiency variance = SR (AH - SH)                                       = $6 (62,000 - 55,000)                                       = $42,000 U The labor efficiency variance is unfavourable because the actual hours are more than the standard hours Labor cost variance = Rate variance + Efficiency variance                                = $401,600 U Variable overhead rate variance = AH (AR- SR)                                                  = 62,000 ($2.6 - $2.25)                                                  = $21,700 U Variable overhead rate variance is unfavourable becasue the actual rate is more than the standard rate Variable overhead efficiency variance = SR (AH - SH)                                                          = $2.25 (62,000 - 55,000)                                                          = $15,750 U Variable overhead efficiency variance is unfavourable becasue the actual hours are more than the standard hours Variable overhead cost variance = $21,700 + $15,750                                                  = $37,450 U The labor efficiency variance is unfavourable because the actual hours are more than the standard hours Labor cost variance = Rate variance + Efficiency variance                                = $401,600 U Variable overhead rate variance = AH (AR- SR)                                                  = 62,000 ($2.6 - $2.25)                                                  = $21,700 U Variable overhead rate variance is unfavourable becasue the actual rate is more than the standard rate Variable overhead efficiency variance = SR (AH - SH)                                                          = $2.25 (62,000 - 55,000)                                                          = $15,750 U Variable overhead efficiency variance is unfavourable becasue the actual hours are more than the standard hours Variable overhead cost variance = $21,700 + $15,750                                                  = $37,450 U Variable overhead efficiency variance is unfavourable becasue the actual hours are more than the standard hours Variable overhead cost variance = $21,700 + $15,750                                                  = $37,450 U

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