\"Wonderful! Not only did our salespeople do a good job in meeting the sales bud
ID: 2562341 • Letter: #
Question
"Wonderful! Not only did our salespeople do a good job in meeting the sales budget this year, but our production people did a good job in controlling costs as well,” said Kim Clark, president of Martell Company. “Our $12,250 overall manufacturing cost variance is only 3% of the $880,000 standard cost of products made during the year. That's well within the 3% parameter set by management for acceptable variances. It looks like everyone will be in line for a bonus this year."
The company produces and sells a single product. The standard cost card for the product follows:
The following additional information is available for the year just completed:
The company manufactured 20,000 units of product during the year.
A total of 78,000 feet of material was purchased during the year at a cost of $3.75 per foot. All of this material was used to manufacture the 20,000 units produced. There were no beginning or ending inventories for the year.
The company worked 32,500 direct labor-hours during the year at a direct labor cost of $11.80 per hour.
Overhead is applied to products on the basis of standard direct labor-hours. Data relating to manufacturing overhead costs follow:
Required:
1. Compute the materials price and quantity variances for the year.
2. Compute the labor rate and efficiency variances for the year.
3. For manufacturing overhead compute:
a. The variable overhead rate and efficiency variances for the year.
b. The fixed overhead budget and volume variances for the year.
Inputs (1)Standard
Quantity
or Hours (2)
Standard
Price
or Rate Standard
Cost
(1) × (2) Direct materials 4.00 feet $ 3.50 per foot $ 14.00 Direct labor 1.5 hours $ 12 per hour 18.00 Variable overhead 1.5 hours $ 2.00 per hour 3.00 Fixed overhead 1.5 hours $ 6.00 per hour 9.00 Total standard cost per unit $ 44.00
Explanation / Answer
Answer
Standard cost for 20000 units
Actual cost for 20000 units
Qty/Hrs
Price/Rate
Cost
Qty/Hrs
Price/Rate
Cost
Direct Materials
80000
3.5
280000
78000
3.75
292500
Direct Labor
30000
12
360000
32500
11.8
383500
Variable Overhead
25000
2
50000
32500
2.1
68250
Fixed Overhead
---Budgeted $150000 for 25000 hours (denominator level)
= $6 per hour
---Standard Fixed overhead for 32500 hours = 32500 x $6 = $195000
---Actual Fixed Overhead = $ 148000
Material Price Variance = (Standard Price – Actual Price) x Actual Quantity
= (3.5 – 3.75) x 78000 = $19500 Unfavorable
Material Quantity Variance = (Standard Quantity – Actual Quantity) x Standard Price
= (80000 – 78000) x 3.5 = $7000 favourable
Labor Rate Variance= (Standard Rate – Actual rate) x Actual Hour
= ( 12 – 11.8) x 32500 = $6500 Favourable
Labor Efficiency Variance = (Standard Hours – Actual Hours) x Standard Rate
= (30000 – 32500) x 12 = 30000 Unfavourable
Variable rate Variance = (Standard Rate – Actual rate) x Actual Hours
= (2 – 2.1) x 32500 = 3250 Unfavourable
Variable Efficiency Variance = (Standard hours – Actual Hours) x Standard Rate
(25000 – 32500) x 2 = 15000 Unfavourable
Fixed Overhead Budget Variance = Standard Fixed overhead – Actual fixed Overhead
= 150000 – 148000 = $2000 Favourable
Fixed Overhead volume variance = Standard fixed overhead for 32500 hours - budgeted overhead
= 195000 – 150000 = 45000 Favourable
Standard cost for 20000 units
Actual cost for 20000 units
Qty/Hrs
Price/Rate
Cost
Qty/Hrs
Price/Rate
Cost
Direct Materials
80000
3.5
280000
78000
3.75
292500
Direct Labor
30000
12
360000
32500
11.8
383500
Variable Overhead
25000
2
50000
32500
2.1
68250
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