Problem 6-32 Crane, Ltd. manufactures shirts, which it sells to customers for em

Question

Problem 6-32 Crane, Ltd. manufactures shirts, which it sells to customers for embroidering with various slogans and emblems. The standard cost card for the shirts is as follows Direct materials Direct labor Variable overhead Fixed overhead Standard Price Standard Quantity Standard Cost $6.00 6.00 2.00 3.00 $17.00 $4 per yard $12 per DLH $4 per DLIH $6 per DLH 1.50 yards 0.50 DLH 0.50 DLH 0.50 DLH Sandy Robison, operations manager, was reviewing the results for November when he became upset by the unfavorable variances he was seeing. In an attempt to understand what had happened, Sandy asked CFO Suzy Summers for more information. She provided the following overhead budgets, along with the actual results for November The company purchased and used 79,600 yards of fabric during the month. Fabric purchases during the month were made at $3.90 per yard. The direct labor payroll ran $319,725, with an actual hourly rate of $12.25 per direct labor hour. The annual budgets were based on the production of 45,000 shirts, using 245,000 direct labor hours. Though the budget for November was based on 50,000 shirts, the company actually produced 52,000 shirts during the month Variable Overhead Budget Indirect material Indirect labor Equipment repair Equipment power Annual Budget Per Shirt November-Actual $0.90 0.60 0.40 0.10 $2.00 $445,000 295,000 195,000 45,000 $980,000 $48,600 30,900 20,000 6,500 $106,000 Total Fixed Overhead Budget Supervisory salaries Insurance Property taxes Depreciation Annual Budget November-Actual $21,000 27,000 6,000 25,500 $255,000 345,000 75,000 315,000

Explanation / Answer

a) Actual Production = 52,000 shirts

Standard Material required for actual production = 52,000 shirts*1.50 yards = 78,000 yards

Direct Material price variance = (Standard Price - Actual Price)*Actual Units

= ($4 - $3.90)*79,600 = $7,960 Favorable

Direct Material quantity variance = (Std. Qty - Actual Qty)*Std. Price

= (78,000 - 79,600)*$4 = ($6,400) Unfavorable

b) Standard Labor hours for Actual production = 52,000 shirts*0.50 DLH = 26,000 DLHs

Actual Labor Hours = Actual Labor cost/Actual labor rate

= $319,725/$12.25 = 26,100 DLHs

Direct labor rate variance = (Std. rate - Actual rate)*Actual Hours

= ($12.00 - $12.25)*26,100 = ($6,525) Unfavorable

Direct labor efficiency variance = (Std. Hours - Actual Hours)*Std. Rate

= (26,000 - 26,100)*$12 = ($1,200) Unfavorable

c) Actual Variable Overhead cost = $21,000+$27,000+$6,000+$25,500 = $79,500

Variable Overhead Spending Variance = (Std. rate*Actual Hours) - Actual variable overhead cost

= ($4*26,100 hrs) - $79,500 = $24,900 Favorable

Variable Overhead Efficiency Variance = (Std hours - Actual Hours)*Std rate

= (26,000 hrs - 26,100 hrs)*$4 = ($400) Unfavorable

d) Actual Fixed Overhead = $123,900

Budgeted Fixed Overhead = 50,000 shirts*$3 per shirt = $150,000

Fixed Overhead Spending variance = Budgeted Fixed Overhead - Actual Fixed Overhead

= $150,000 - $123,900 = $26,100 Favorable

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