“Wonderful! Not only did our salespeople do a good job in meeting the sales budg

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 $15,400 overall manufacturing cost variance is only 4% of the $1,536,000 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:

A total of 65,000 feet of material was purchased during the year at a cost of $4.00 per foot. All of this material was used to manufacture the 15,000 units. There were no beginning or ending inventories for the year.

The company worked 28,000 direct labor-hours during the year at a direct labor cost of $10.70 per hour.

Overhead is applied to products on the basis of standard direct labor-hours. Data relating to manufacturing overhead costs follow:

Compute the materials price and quantity variances for the year. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)

Compute the labor rate and efficiency variances for the year. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)

The variable overhead rate and efficiency variances for the year. (Input all amounts as positive values. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e, zero variance).)

The fixed overhead budget and volume variances for the year. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

“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 $15,400 overall manufacturing cost variance is only 4% of the $1,536,000 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.”

Explanation / Answer

1. Materials Price Variance = (Standard Price - Actual Price) x Actual Quantity
   = ($3.80 - 4) x 65,000 = $13,000 (U)
(As actual price is more than the standard price, the price variance is unfavorable)

Materials Quantity Variance = (Standard Quantity for actual output - Actual quantity used) x Standard Price
Standard quantity for actual output = 15,000 x 4.50 = 67,500 feet
Actual quantity used = 65,000 feet
So, Materials Quantity Variance = (67 500 - 65,000) x 3.80 = $9,500 (F)

(As actual quantity used is less than the standard quantity for actual output, the quantity variance is favorable)

2. Labor Rate Variance = (Standard labor rate per hour - Actual labor rate per hour) x Actual labor hours
=  ($11.00 - $10.70) x 28,000 = 28000 x 0.30 = $8,400 (F)

(As actual labor rate per hour is less than the standard labor rate per hour, the labor rate varinace is favorable)

Labor Efficiency Variance = (Standard labor hours for actual output - Actual labor hours) x Standard labor rate
Standard labor hours for actual output = 15,000 units x 1.70 hours per unit = 25,500 hours

So, labor efficiency variance = (25,500 - 28,000) x $11 = $27,500 (U)

(As actual labor hours is less than the standard labor hours for actual output, the efficiency varinace is favorable)

3. Overhead variances

a. Variable overhead rate variance = (Standard variable overhead rate per hour - Actual variable overhead rate) x Actual hours
= ($2.50 - 72,800 / 28,000) x 28000 = ($2.50 - $2.60) x 28,000 = 2,800 (U)

(As actual variable overhead rate is more than the standard rate, the variable overhead rate variance is unfavorable)

Variable overhead efficiency variance = (Standard hours - Actual hours)xStandard variable overhead rate per hr.

= (15000 x 1.7 - 28000) x 2.50 = 6,250 (U)

b. Fixed overhead budget variance = Budgeted fixed overheads - Actual fixed overhead
= 15,000 x 9.35 - 124,000 = 140,250 - 124,000 = 16,250 (F)

(As actual fixed overhead is less than the budgeted fixed overhead, the fixed overhead budget variance is favorable)

Fixed overhead volume variance = Fixed overheads budgted to be applied - Fixed overheads actually applied)
= (140,250 - 15000 x 9.35) =0 (None)

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