Hayes Chemical Company produces a chemical used in dry cleaning. Its accounting

Question

Hayes Chemical Company produces a chemical used in dry cleaning. Its accounting system uses standard costs. Standards for each 0.5-gallon can of chemical and actual data for Hayes Chemical follow: Standards and budgeted information:    Gallons of material per can of chemical 1.20    Hours of labor per can of chemical 1.50    Standard cost per gallon of material $6.00    Standard cost per hour of labor $9.00    Overhead application rate per can $7.75    Expected production - cans of chemical 20,000    Expected fixed overhead per year $55,000    Variable overhead rate per 0.5-gallon can $5.00 Actual information for 2018:    Cans produced   23,000    Gallons of material purchased 35,000    Cost of material purchased $250,000    Gallons of material used in production 30,000    Cost of direct labor incurred $290,000    Average wage rate per hour $8.25    Actual overhead cost $220,000 Required a. Determine the standard cost per unit. Material $1.20 ×           6.00 = $         7.20 Labor $1.50 × $9.00 =           13.50 Variable overhead     5     5             5.00 Fixed overhead $55,000 ÷       20,000 =             2.75 Total unit cost $       28.45 b. Calculate the material, labor, and overhead standards. Material price variance 250000 × = Favorable or unfavorable?   Material quantity variance × = Favorable or unfavorable?   Labor rate variance × = Favorable or unfavorable?   Labor efficiency variance × = Favorable or unfavorable?   Overhead controllable variance = Favorable or unfavorable?   Overhead volume variance = Favorable or unfavorable?   c. List a possible cause for each variance. Unfavorable Material Price Variance: Unfavorable Material Quantity Variance: Favorable Labor Rate Variance: Unfavorable Labor Efficiency Variance: Unfavorable Controllable Overhead Variance: Favorable Overhead Volume Variance: Hayes Chemical Company produces a chemical used in dry cleaning. Its accounting system uses standard costs. Standards for each 0.5-gallon can of chemical and actual data for Hayes Chemical follow: Standards and budgeted information:    Gallons of material per can of chemical 1.20    Hours of labor per can of chemical 1.50    Standard cost per gallon of material $6.00    Standard cost per hour of labor $9.00    Overhead application rate per can $7.75    Expected production - cans of chemical 20,000    Expected fixed overhead per year $55,000    Variable overhead rate per 0.5-gallon can $5.00 Actual information for 2018:    Cans produced   23,000    Gallons of material purchased 35,000    Cost of material purchased $250,000    Gallons of material used in production 30,000    Cost of direct labor incurred $290,000    Average wage rate per hour $8.25    Actual overhead cost $220,000 Required a. Determine the standard cost per unit. Material $1.20 ×           6.00 = $         7.20 Labor $1.50 × $9.00 =           13.50 Variable overhead     5     5             5.00 Fixed overhead $55,000 ÷       20,000 =             2.75 Total unit cost $       28.45 b. Calculate the material, labor, and overhead standards. Material price variance 250000 × = Favorable or unfavorable?   Material quantity variance × = Favorable or unfavorable?   Labor rate variance × = Favorable or unfavorable?   Labor efficiency variance × = Favorable or unfavorable?   Overhead controllable variance = Favorable or unfavorable?   Overhead volume variance = Favorable or unfavorable?   c. List a possible cause for each variance. Unfavorable Material Price Variance: Unfavorable Material Quantity Variance: Favorable Labor Rate Variance: Unfavorable Labor Efficiency Variance: Unfavorable Controllable Overhead Variance: Favorable Overhead Volume Variance:

Explanation / Answer

Material price variance

It is the responsibility of production manager to keep a check on excessive use of materials. However if purchase manager purchases low quality materials to improve the direct materials price variance then purchasing department would be considered responsible for the variance.

Material quantity variance

Generally speaking, the purchase manager has control over the price paid for goods and is therefore responsible for any price variation. Many factors influence the price paid for the goods, including number of units ordered in a lot, how the order is delivered, and the quality of materials purchased. A deviation in any of these factors from what was assumed when the standards were set can result in price variance. For example purchase of second grade materials rather than top-grade materials may be a reason of favorable price variance, since the lower grade material will generally be less costly but perhaps less suitable for production and can be a reason of unfavorable materials quantity variance.

Favourable labour rate variance:

Unfavourable labour efficiency variance

Some common reasons are as follows:

Material Price variance    =(AR-SR)*AQ purchased    =(7.14-6)*35000 39900 It is unfavourable Material Quantity variance     =(SQ-AQ used )*SP    =(20000-30000)*6 60000 it is unfavorable Labour rate variance =(SR-AR)*AH USED AH used    =290000/8.25 AH used 35151.52    =(9-8.25)*35152 Labour rate variance 26364 It is favourable Labour efficiency variance     =(Actual hours -standard hour allowed )SR    =(29000/8.25- 20000*1.5)9 46368 It is unfavorable Variable OH variance     =(AR-SR)*AH worked      =(8.25-5)*3515 11423.75 it is unfavorable

Material price variance

It is the responsibility of production manager to keep a check on excessive use of materials. However if purchase manager purchases low quality materials to improve the direct materials price variance then purchasing department would be considered responsible for the variance.

Material quantity variance

Generally speaking, the purchase manager has control over the price paid for goods and is therefore responsible for any price variation. Many factors influence the price paid for the goods, including number of units ordered in a lot, how the order is delivered, and the quality of materials purchased. A deviation in any of these factors from what was assumed when the standards were set can result in price variance. For example purchase of second grade materials rather than top-grade materials may be a reason of favorable price variance, since the lower grade material will generally be less costly but perhaps less suitable for production and can be a reason of unfavorable materials quantity variance.

Favourable labour rate variance:

• The expected mix of pay levels among the production staff
• The amount of overtime likely to be incurred
• The amount of new hiring at different pay rates
• The number of employees retiring
• The number of promotions into higher pay levels
• The outcome of contract negotiations with any unions representing the production staf

Unfavourable labour efficiency variance

Some common reasons are as follows:

1. Inexperienced workers
2. Poorly motivated workers
3. Old or faulty equipment
4. Purchase of low quality or unsuitable direct materials
5. Poor supervision
6. Insufficient demand for company’s product
7. Frequent breakdowns
8. Shortage of raw materials
9. Just in time manufacturing system

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