Rain Gear, Inc., produces rain jackets. The master budget shows the following st

Question

Rain Gear, Inc., produces rain jackets. The master budget shows the following standards information:

Direct materials 4 yards per unit at $3 per yard

Direct labor 2 hours per unit at $10 per hour

Variable overhead 2 direct labor hours per unit at $4 per hour

Rain Gear actually produced and sold 30,000 units. During the year, the company purchased 130,000 yards of material for $429,000 and used 118,000 yards in production. A total of 65,000 labor hours were worked during the year at a cost of $637,000. Variable overhead costs totaled $231,000 for the year. Rain Gear applies fixed manufacturing overhead costs to products based on direct labor hours. It expected to produce and sell 28,000 units for the year. Information for the year appears as follows.

Budgeted fixed overhead costs $280,000

Budget direct labor hours /56,000

Standard cost per direct labor hours $5

Standard direct labor hours per unit 2

Actual production 30,000 units

Actual fixed overhead costs $295,000

a. Calculate the materials price and quantity variances. Label each variance as favorable or unfavorable. b. Calculate the labor rate and efficiency variances. Label each variance as favorable or unfavorable. c. Calculate the variable overhead spending and efficiency variances. Label each as favorable or unfavorable. d. Provide two possible explanations for each variance greater than $20,000. e. Calculate the fixed overhead spending and production volume variances. Label each variance as favorable or unfavorable.

Explanation / Answer

(a)

(i) Material price variance = Actual quantity x (Actual price - Standard price)

= $429,000 - 130,000 x $3 = $(429,000 - 390,000) = $39,000 (Unfavorable)

(ii) Material quantity variance = Standard price x (Actual quantity - Standard quantity)

= $3 x [130,000 - (30,000 x 4)] = $3 x (130,000 - 120,000) = $3 x 10,000 = $30,000 (Unfavorable)

(b)

(i) Labor rate variance = Actual hours x (Actual rate - Standard rate)

= $637,000 - ($10 x 2 x 30,000) = $(637,000 - 600,000) = $37,000 (Unfavorable)

(ii) Labor efficiency variance = Standard rate x (Actual hours - Standard hours)

= $10 x [65,000 - (30,000 x 2)] = $10 x (65,000 - 60,000) = $10 x 5,000 = $50,000 (Unfavorable)

(c)

(i) Variable Overhead spending variance = Actual hours x (Actual variable rate - Standard overhead rate)

= $231,000 - (30,000 x 2 x $4) = $(231,000 - 240,000) = $9,000 (Favorable)

(ii) Variable Overhead efficiency variance = Standard rate x (Actual hours - Standard hours)

= $4 x [65,000 - (30,000 x 2)] = $4 x (65,000 - 60,000) = $4 x 5,000 = $20,000 (Unfavorable)

(d)

(i) Material price variance may be caused by:

- Actual price being higher than standard price, or

- Inefficient purchase system

(ii) Material quantity variance can be caused by:

- Actual quantity required is more than standard quantity, or

- Higher wastage and spillage in production

(iii) Labor rate variance may be caused by:

- Higher wage rate actually paid than is standard

- Union or government raising minimum wage rate

(iv) Labor efficiency variance may be caused by:

- Actual hours being more than standard hours, or

- Inefficient production technology and/or machinery depreciation causing more hours to be worked

Note: First 4 sub-parts are answered.

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