Question 2 (25 Marks) Toy Factory manufactures a special superhero rubber toy. O

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Question 2 (25 Marks) Toy Factory manufactures a special superhero rubber toy. Overhead is applied to the the basis of direct-labour hour. The following stane Direct materials: 0.6 kg of rubber per toy at So.1 per kg Direct labour: 0.1 hour per toy at $17 per hour Variable manufacturing overhead: 0.1 hour per toy at $5 per hour Fixed manufacturing overhead: 0.1 hour per toy at $4 per hour During the year the company produced 30,000 superhero rubber toys using its 1,000 kg of rubber remaining in last year's ending inventory. The fixed overhead budget for the year was $24,000 Actual data for the production for the year is as follows: Direct Materials: 20,000 kilograms of rubber was purchased at a cost of S0.3 per kg, 4,000 kg of the rubber was still in the inventory at the end of the month. Direct labour: 5,000 DLH hours were worked at $75,000 Variable manufacturing overhead costs were $15,000 Fixed manufacturing overhead costs were $30,000 Required: a) Compute the materials, labour, and overhead variances. (15 marks) b) Were the overhead costs overapplied or underapplied? (5 marks) c) What are the advantages and disadvantages of capacity analysis in regard to variance analysis (5 marks) x Actual Pmi

Explanation / Answer

Part-a Computation of Direct Material Price & Quantity Variance Working Note Direct Material Price Price variance (SP-AP)AQ ($0.1-$0.3)*20000 ($4,000) Unfavourable a. Material Quanitity Consumed (AQ) Direc Material Quantity Variance (SQ-AQ)SP (18000 -17000)*0.1 $100 Faovourable =1000 (opg. Bal)+20000 ( Purchase)-4000 (Closing Stock)=17000 Kg Computation of Direct Labour Rate & Efficiency Variance b. Standard Quanity Cosnumed (SQ) Direct Labour Rate variance (SR-AR)*AH (17-15)*5000 $10,000 Favourable =0.6 Kg*30000toy=18000 kg Direct Labour Efficiency Variance (SH-AH)SR (3000-5000)*17 ($34,000) Un Favourable c. Actual Rate/Hour (AR) Computation of variable Overhead   Rate & Efficiency & Spending   Variance =$75000/5000 DLH=$15/Hour Direct Variable Overhead Rate Variance ( SR-AR)*AH (5-3)*5000 $10,000 Favourable Direct Variable Overhead Efficiency Variance (SH-AH)SR (3000-5000)*5 ($10,000) Un Favourable d. Standard Hours(SH) Direct Variable Overhead Spending Variance Price variance+ Quantity Variance $0 Un Favourable =30000Toy*0.1 Hour/toy==3000 Hour Computation of Fixed Overhead Rate & Volume & Spending   Variance e. AR of Variable Overhead Direct Fixed Overhead Rate Variance Budgeted OH- Actual OH 24000-30000 ($6,000) Un Favourable =$15000/5000 DLH=$3/DLH Direct Fixed Overhead Volume Variance Standard Rate applied on standard Hour for actual Qty- Budgeted OH (3000*4)-24000 ($12,000) Un Favourable Direct Fixed Overhead Spending Variance Price variance+ Quantity Variance ($18,000) unFavourable b): Overhead are underapplied C) Capacity Analysis is basically a further detail analysis of Fixed Overhead Volume Variance, by ascertaining Revised Capacity variance and calendar Variance Advantage of Capactiy Variance. To Breakdown the Volume Variance in Capacity variance and further in Revised Capaity Variance and Calendor Variance. By Revised Capacity Variance, it can be easly analysis tht whether full capacity utilisation or not . In case of Undercapitalisation, more opportunity can be explore by Management. By Calendor Variance, it can be reviewed that How many days capacity was not utilised in day term and necessary step can be taken accordingly. Disadvantage Through Capacity Analysis, its easily determine that whether capactity are utilised fully or not and accordingly it will effect on employees wages/salary. Through Capacity Analysis, Current utlisation can be determined and accordingly further expansion plan need to be reviewd which involve huge cost in hand of Management.

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