Wagner, Inc., manufactures truck tires. The following information is available f

Question

Wagner, Inc., manufactures truck tires. The following information is available for the last operating period. • Wagner produced and sold 41,000 tires for $52 each. Budgeted production was 45,000 tires. • Standard variable costs per tire follow: Direct materials: 4 pounds at $3.50 $ 14.00 Direct labor: .75 hours at $16.00 12.00 Variable production overhead: .10 machine-hours at $15 per hour 1.50 Total variable costs $ 27.50 • Fixed production overhead costs: Monthly budget $ 1,350,000 • Fixed overhead is applied at the rate of $30 per tire. • Actual production costs: Direct materials purchased and used: 175,000 pounds at $3.20 $ 560,000 Direct labor: 28,500 hours at $16.30 464,550 Variable overhead: 5,000 machine-hours at $15.70 per hour 78,500 Fixed overhead 1,425,000 Required: (a) Prepare the cost variance analysis for each variable cost for Wagner. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

Explanation / Answer

Direct Material Variances:

Direct material Quantity variance

= (Standard quantity for actual output – actual quantity) x standard price per unit of material

= (4 pounds/litre x 41000 pounds – 175000 pounds) x $3.50 / pound

= (164000 pounds – 175000 pounds) x $3.50 / pound

= $38500 Unfavourable

Direct material Price Variance

= (Standard price – actual price)x quantity purchased

= ($3.50 / pound - $ 3.20 / pound) x 175000 pound

= $52500 Favourable

Direct labour Variances

Direct labour Rate Variance

= (Standard rate per hour – actual rate per hour) x actual labour hours used

= ($16/hour - $16.30/hour) x 28500 hours

= $8550 Unfavourable

Direct Labour efficiency Variance

= (Standard labour hours required for actual production – actual labour hours used) x standard rate per hour

= (0.75 hours/litre x 41000 litres – 28500 hours) x $ 16 / hour

= (30750 hours – 28500 hours) x $16/hour

= $ 36000 Favourable

Variable Overhead Variances:

Variable overhead spending variance

= (standard overhead rate – actual overhead rate) x Actual machine hours worked

= ($15/hour - $15.70/hour) x 5000 hours

= $3500 Unfavourable

Variable overhead efficiency variance

=(Standard machine hours required for actual production – actual machine hours used) x standard rate per hour

=(0.10 hour/litre x 41000 litres – 5000 hours) x $15 / hour

= (4100 hours – 5000 hours) x $15/hour

= $13500 Unfavourable

Fixed Overhead Variances

Fixed overhead expenditure/spending variance

= Actual Fixed overhead – budgeted fixed overhead

= 1425000 – 1350000

= $75000 Unfavourable

Fixed overhead volume variance

= Actual output x standard overhead absorption rate – budgeted output x standard overhead absorption rate

= Overhead applied/absorbed – Budgeted Fixed overhead

= 41000 x $30 - $1350000

= $ 1230000 - $1350000

= $ 120000 Unfavourable

Fixed Overhead Capacity variance

= (Budgeted production hours – actual production hours) x standard overhead absorption rate

= (45000 x 0.10 hours – 5000 hours) x $300/hour

= $150000 Favourable

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