Actual: Bought 1,100 pounds for $1,155 Used 760 pounds of RM DL was $6,932.50 fo

Question

Actual: Bought 1,100 pounds for $1,155 Used 760 pounds of RM DL was $6,932.50 for 1,175 hours $4,650 $18,100 Actual Production = 390 units Standards: RM - 2 pounds$1.00/ pound DL - 3 hours @ $6.00/ hour VOH 3 hours @$4.00 / hour FOH - 3 hours $15.00/ hour Normal production 400 units Required - Determine the following six variances and indicate it's "direction". NAME AMOUNT F UN 1 - Raw Material Price 2 - Raw Material Quantity 3 - Direct Labor Rate 4 - Direct Labor Efficiency 5-Variable Overhead Spending 6 - Fixed Overhead Spending 7 - Overhead Efficiency 8 - Overhead Volume

Explanation / Answer

Solution:

1)

Material Price Variance

Material Price Variance is the variance arises in the material cost due to difference in actual material purchase price from standard material price. Mathematically, it is calculated as below:

Material Price Variance = Actual Quantity (Standard Price – Actual Price)

Note --- Here actual quantity means actual quantity of material PURCHASED. If the question does not provide the information about material purchase, it is taken as equal to material consumed.

Actual quantity of raw material purchased = 1,100 pounds

Actual price per pound = $1,155 / 1,100 = $1.05 per pound

Standard Price per pound = $1.00 per pound

Material Price Variance = Actual Quantity Purchased 1,100 (Standard Price 1 - Actual Price 1.05) = $55 Unfavorable

2) Material Quantity/Efficiency/Usage Variance

Material Efficiency (Usage) Variance measures variance in material cost due to usage/consumption of materials. It is calculated as below:

Material Quantity Variance = Standard Price (Standard Quantity for Actual Production – Actual Quantity USED)

Note --- Here actual quantity means actual quantity of material CONSUMED/USED

Actual Quantity Used in production = 760 pounds

Standard Quantity for Actual Production = Actual Produced Units 390 Units x 2 pounds per unit as per standard = 780 pounds

Material Quantity Variance = Standard Price 1 (Standard Quantity for Actual Production 780 – Actual Quantity USED 760)

= $20 Favorable

3) Labor Rate/Price Variance

Labor Price Variance – It arises due to difference in actual rate paid from standard rate. It is calculated as below:

Labor Price Variance = Actual Time (Standard Rate per hour – Actual Rate per hour)

Here, actual time means time for which wage has been paid.

Actual Rate per hour = $6932.50 / 1175 hours = $5.90

Actual Hours worked = 1,175 hours

Standard Rate = $6 per hour

Labor Rate Variance = Actual Time 1175 (Standard Rate per hour $6 – Actual Rate per hour $5.90)

= $117.50 Favorable

4) Labor Efficiency / Usage Variance

Labor Efficiency Variance – It arises due to variation in the working hours from the set standard.

Standard Hours for Actual Production = Actual Produced Units 390 Units x Per Set allowed standard hour 3 hours

= 1170 Hours

Labor Efficiency Variance = Standard Rate $6 (Std. hours for actual production 1,170 – Actual Hours 1175)

= $30 Unfavorable

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