Last year, Lopez Industries, Inc., researched and perfected a cure for the commo

Question

Last year, Lopez Industries, Inc., researched and perfected a cure for the common cold. Called Cold-Gone, the product sells for $28.00 per package, each of which contains five tablets. Standard unit costs for this product were developed late last year for use this year. Per package, the standard unit costs were as follows: chemical ingredients, ounces at $1.00 per ounce; packaging, $1.20; direct labor, 0.8 hour at $14.00 per hour; standard variable overhead, $4.00 per direct labor hour; and standard fixed overhead, $6.40 per direct labor hour. Normal capacity is 46,875 units per week In the first quarter or this year, demand for the new product rose well beyond the expectations of man the company produced and over 500,000 packages of Cold-Gone. During the first week in April, it produced 50,000 packages but used materials for 50,200 packages costing agement. During those thre months, the peak season for colds 240. It also used 305,000 ounces of chemical ingredients costing $292,800. The as $579,600; direct labor hours totaled 40,250. total cost of direct labor for the week w Total variable overhead was $161,100, and total fixed overhead was $242,000 Budgeted fixed overhead for the week was $240,000. Instructions: 1. Compute for the first week of April and indicate whether the variance is favorable or unfavorable: (a) all direct materials price variances, (b) all direct materials quantity variances, (c) the direct labor rate variance, (d) the direct labor efficiency variance, (e) the variable overhead spending variance, (f) the variable overhead efficiency variance, (g) the fixed overhead budget variance, and (h) the fixed overhead volume variance. 2. Prepare a performance report based on your variance analysis (following example on page 310) and suggest possible causes for each significant variance.

Explanation / Answer

TotalQuantity of production 50,000 Standard Actual A B=A*50000 C D=C*50000 Unit Total Unit Total Chemical ingredient quantity (Ounce) 6 300000 6.1 305000 Chemical ingredient cost (6 ounces*$1 per ounce) $6 $        300,000 $5.86 $292,800 (per unit=292800/50000) Packaging $1.20 $60,000 $1.205 $60,240 (per unit cost=60240/50000) Direct labor hour 0.8 40000 0.805 40250 per unit=(40250/50000) Direct labor cost(0.8 hour *$14) $            11.20 $        560,000 $11.59 $579,600 (per unit cost=579600/50000) Variable overhead cost($4 per direct labor hour) $              3.20 $        160,000 $3.22 $161,100 Fixed overhead cost($6.4 per direct labor hour) $              5.12 $        256,000 $4.84 $242,000 Budgeted fixed overhead=$240000 Standard price of packaging per unit=$1.2 Actual price of packaging per unit=60240/50200= 1.2 Direct material price variance=Actual Quantity(Standard price-actual price) Direct material quantity variance=Standard price(Standard quantity-actual quantity) Chemical ingredient actual priceper ounce=5.86/6.1= $0.96 Chemical ingredient Price Variance $         12,200 ((1-0.96)*305000) Chemical ingredient Quantity Variance $         (5,000) ($1*(300000-305000) Packaging material price variance=50200*(1.2-1.2) $0 Packaging material quantity variance=1.2*(50000-50200) $             (240) (a) All direct material price variances $12,200 (12200+0) (b) All direct material quantity variances ($5,240) (-5000-240) Direct labor rate variance=Actual hours*(Standard rate-Actual rate) Direct labor efficiencyvariance=Standard rate*(Standard hours-Actual hours) Direct labor actual rate=11.59/0.805)= $14.40 .(c) Direct labor rate variance=40250*(14-14.4) $       (16,100) (d) Direct labor efficiency variance=14*(40000-40250) $         (3,500)

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