PROBLEM APPLICATION 6: CHAPTER 23: STANDARD COST SYSTEMS, 25 POINTS. Use blue in

Question

PROBLEM APPLICATION 6: CHAPTER 23: STANDARD COST SYSTEMS, 25 POINTS. Use blue ink and present your solutions in good form in the answer sheets provided after the problems. You need to submit only the answer sheets. You need to show all necessary formulas and calculations. You need to submit the solution to this problem after Chapter 23 is completed. Hear Smart manufactures headphone cases. During September 2018, the company produced and sold 105,000 cases and recorded the following cost data Standard Cost Information Direct Materials Direct Labor Variable Manufacturing Overhead Quantity Cost 2 parts 0.02 hours8.00 pr hour 0.02 hours 10.00 per hour $ 0.15 per part Fixed Manufacturing Overhead ($28.500 for static budget volume of 95000units and 1,900 hours, or $15 per hour) Actual Cost Information Direct Materials Direct Labor Variable Manufacturing Overhead Fixed Manufacturing Overhead (209,000 parts@S0.20 per part) (1,600 hours @ $8.15 per hour) 41,800 13,040 9,000 26,000 Requirements 1. Compute the cost and efficiency variances for direct materials and direct labor. 2. For manufacturing overhead, compute the variable overhead cost and efficiency variances and the fixed overhead cost and volume variances. 3. Hear Smart's management used better quality materials during September. Discuss the trade- off between the two direct material variances.

Explanation / Answer

3.

Even though the company used better quality materials the overal material cost shows an unfavourable variance of $10,300. This is due to the fact that there is only a very little impact of the better quality material as canbe seen from the material efficiency variance of $150 favourable, whereas the price variance is $10,450 unfavourable. This means that the high cost of the better quality material does not match the benefits of its usage.

Direct material cost variance 10450 Unfavourable Direct material efficiency variance 150 Favourable Direct labor cost variance 240 Unfavourable Direct labor efficiency variance 4000 Favourable Material Variances: Direct material cost variance (0.15 - 0.20) x 209,000 (SP - AP) X AQ 10450 Unfavourable Direct material efficiency variance (210,000 - 209,000) x 0.15 (SQ - AQ) x SP 150 Favourable Where SP = Standard price AP = Actual price SQ = Standard quantity for actual production = 105,000 x 2 = 210,000 AQ = Actual quantity used Labor Variances: Direct labor cost variance (8.00 - 8.15) x 1,600 (SR - AR) X AH 240 Unfavourable Direct labor efficiency variance (2,100 - 1,600) x 8.00 (SH - AH) x SR 4000 Favourable Where SR = Standard rate per hour AR = Actual rate per hour SH = Standard hours required for actual production = 105,000 x 0.02 = 2,100 AH = Actual hours used

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