5. You are the accountant for a small donut shop that specializes in making your
ID: 2564343 • Letter: 5
Question
5. You are the accountant for a small donut shop that specializes in making your own world famous donut called 'Special Rounds'. Your boss, the owner, is great at making 'Special Rounds' but not great at understanding some of the financial issues. He came into your office to get your help. He does not understand why he is spending more money and why has a loss. He raised the price of the donuts, cut back hours and people by approximately 2 full-time people but still seems to be more and more behind. He wants you to explain it to him. You put together the following information and are about to analyze the data. 1. The budget is to make 2,308 donuts daily, 7 days a week, every week during the year. 2. The standard price per oz. of material is $1.00. 3. The standard amount of material for each 'Special Round' is 1 oz. of material. 4. You actually made and sold 756,100 'Special Rounds' for the year. 5. You actually used 831,710 oz. of material 6. You paid a great price for the materials of $0.95 per oz. 7. Your standard rate of pay is $10 per hour. 8. Your standard number of employees is 10 people, each working 40 hours per week, every week of the vear. 9. Due to new regulations and laws you now pay $15 per hour. 10. You cut everyone's weekly hours to 35 hours per week, every week of the year and now only have 9 employees. Compute the direct materials variances: price and quantity and total variances for the year Indicate whether each variance is favorable or unfavorable. Show details and use the format learned in class to earn the points. (9 points) Hint: AQ x AP AQ x SP SQ x SP B) Compute the direct labor variances: rate and efficiency and total variances for the year. Indicate whether each variance is favorable or unfavorable. Show details and use the format learned in class to earn the points. (9 points) Hint: AH x SR AH x SR SH x SR C) Explain the reasons for any and all variances (rates, quantities, efficiency). (6 points)Explanation / Answer
PART A
Direct Material Variances
Particulars
S.No.
Price Variance
Actual price in $
A
0.95
Standard Price in $
B
1.00
Actual Quantity in Oz.
C
831,710.00
Price Variance in $
D=C*(B-A)
41,585.50
Favourable
Quantity Variance
Actual Quantity in Oz.
E
831,710.00
Standard Quantity in Oz.(1 Oz. per actual Donut produced)
F
756,100.00
Standard Price in $
G
1.00
Quantity Variance in $
H=G*(F-E)
-75,610.00
Unfavourable
Total Variance
Standard Cost in $
I=B*F
756,100.00
Actual Cost in $
J=C*E
790,124.50
Total Variance in $
K
-34,024.50
Unfavourable
Sanity Check
Price Variance
D
41,585.50
Quantity Variance
H
-75,610.00
Total Variance
K=D+H
-34,024.50
PART B
Direct Labor Variances
Particulars
S.No.
Price Variance
Actual Rate in $
A
15.00
Standard Rate in $
B
10.00
Actual hours
C
16,380.00
Price Variance in $
D=C*(B-A)
-81,900.00
Unfavourable
Efficiency Variance
Actual hours
E
16,380.00
Standard hours
F
20,800.00
Standard Rate in $
G
10.00
Efficiency Variance in $
H=G*(F-E)
44,200.00
Favourable
Total Variance
Standard Cost in $
I=B*F
208,000.00
Actual Cost in $
J=C*E
245,700.00
Total Variance in $
K
-37,700.00
Unfavourable
Sanity Check
Price Variance
D
-81,900.00
Quantity Variance
H
44,200.00
Total Variance
K=D+H
-37,700.00
PART C
Below are the reasons for variances:
Material Price Variance: We paid $ 41,585.50 less for materials because of reduction in actual price as compared to standard price. Hence we have a favorable variance.
Material Quantity Variance: We purchased extra quantity by 75,610 Ounces, which made our variance unfavorable.
Total Variance: In total, we paid $ 34,024.50 extra for materials due to substantial increase in quantity consumed; hence we had an unfavorable variance in terms of Direct Material.
Labor Price Variance: We paid $ 81,900 more for labor because of increase in rate as per new regulation. Hence we have an unfavorable variance.
Labor Quantity Variance: Due to reduction in working hours and number of employee, we reduced our labor efficiency variance by $ 44,200.
Total Variance: In total, we paid $ 37,700 extra for labor due to substantial increase in hourly rate; hence we had an unfavorable variance in terms of Direct Labor.
PART A
Direct Material Variances
Particulars
S.No.
Price Variance
Actual price in $
A
0.95
Standard Price in $
B
1.00
Actual Quantity in Oz.
C
831,710.00
Price Variance in $
D=C*(B-A)
41,585.50
Favourable
Quantity Variance
Actual Quantity in Oz.
E
831,710.00
Standard Quantity in Oz.(1 Oz. per actual Donut produced)
F
756,100.00
Standard Price in $
G
1.00
Quantity Variance in $
H=G*(F-E)
-75,610.00
Unfavourable
Total Variance
Standard Cost in $
I=B*F
756,100.00
Actual Cost in $
J=C*E
790,124.50
Total Variance in $
K
-34,024.50
Unfavourable
Sanity Check
Price Variance
D
41,585.50
Quantity Variance
H
-75,610.00
Total Variance
K=D+H
-34,024.50
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