A company has developed the following standard cost data based on a denominator
ID: 2466068 • Letter: A
Question
A company has developed the following standard cost data based on a denominator volume of 60,000 direct labor hours (DLHs), which is 75% of the firm's capacity. Budgeted fixed overhead is $360,000 and budgeted variable overhead is $180,000 at this level of activity.
Direct material (3 lbs at $2.00/lb) $6.00
Direct labor (0.5 hrs at $8.00/hr) $4.00
Factory overhead (0.5 hrs at $9.00/hr) $4.50
Total standard cost per unit $14.50
During the last period, the company used 48,000 DLHs to produce 128,000 units. It incurred the following manufacturing costs:
Actual cost incurred:
Direct material (380,000 lbs) $779,000
Direct labor (63,000 hrs) $507,150
Variable overhead $220,000
Fixed overhead $365,000
Determine all variances for direct materials, direct labor, and factory overhead.
Explanation / Answer
(1) Direct material variances
(a) Price variance = Actual quantity x (Actual rate - Standard rate)
= $779,000 - (380,000 x $2) = $(779,000 - 760,000) = $19,000 (Adverse)
(b) Usage variance = Standard rate x (Actual quantity - Standard quantity)
= $2 x [380,000 - (3 lb x 128,000)] = $2 x [380,000 - 384,000] = $2 x (- 4,000)
= $8,000 [Favorable] [Ignoring negative sign]
(c) Total variance = Actual material cost - Standard material cost
= $779,000 - ($6 x 128,000) = $(779,000 - 768,000) = $11,000 (Adverse)
(2) Direct labor variances
(a) Rate variance = Actual hours x (Actual rate - Standard rate)
= $507,150 - (63,000 x $8) = $(507,150 - 504,000) = $3,150 (Adverse)
(b) Efficiency variance = Standard rate x (Actual hours - Standard hours)
= $8 x [63,000 - (0.5 x 128,000)] = $8 x [63,000 - 64,000] = $8 x (- 1,000)
= $8,000 (Favorable) [(ignoring negative sign]
(c) Total variance = Actual labor cost - Standard labor cost
= $507,150 - ($4 x 128,000) = $(507,150 - 512,000)
= $4,850 (Favorable) [Ignoring negative sign]
(3) Overhead variances
(a) Spending variance = Actual overhead - (Actual hours x Standard overhead rate)
= $[220,000 + 365,000] - [63,000 x $(4 + 4.5)]
= $585,000 - (63,000 x $8.5) = $(585,000 - 535,500) = $49,500 (Adverse)
(b) Efficiency variance = Standard overhead rate x (Actual hours - Standard hours)
= $(4 + 4.5) x [63,000 - (0.5 x 128,000)]
= $8.5 x (63,000 - 64,000) = $8.5 x (- 1,000)
= $8,500 (Favorable) [Ignoring negative sign]
(c) Total variance = Actual overhead cost - Standard overhead cost
= $(220,000 + 365,000) - ($8.5 x 0.5 x 128,000) = $(585,000 - 544,000) = $41,000 (Adverse)
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