3 Gripper Tire Co. manufactures automobile tires. Standard costs and actual cost

Question

3 Gripper Tire Co. manufactures automobile tires. Standard costs and actual costs for direct materials, direct labor, and factory overhead incurred for the manufacture of 4,160 tires were as follows Actual Costs Standard Costs 100,000 lbs at $6.40 2,080 hrs. at $15.75 Rates per direct labor hr, based on 100% of normal capacity of 2,000 direct labor hrs: 101,000 lbs. at $6.50 Direct materials Direct labor Factory overhead 2,000 hrs at $15.40 Variable cost, $4.00 Fixed cost, $6.00 200 variable cost $12.000 fixed cost Each tire requires O.S hour of direct labor Required: Determine the direct materials price variance, direct materials quantity variance and the total materiah variance Determine the direct labor rate variance, direct labor time variance and the total direct labor cost variance. Determine the variable factory overhead controllable variance, the fixed factory overhead volume variance and the total factory overhead cost variance, Review the material vanances and for each determine the impact on the income statement, identify a possible reason for the vaniance and provide a recommendation the variance

Explanation / Answer

a. Direct Material Variances Direct material Price Variance (Actual price/qty.-Std.Price/qty.)*Actual quantity (6.50-6.40)*101000= 10100 UF Direct material Quantity Variance (Actual quantity-Std. qty. for actual prodn.)* Std. Price/qty. (101000-100000)*6.40= 6400 UF Total direct material Cost variance= (Actual qty.* Actual price/qty.)-(Std. qty.*Std.price/qty.) (101000*6.50)-(100000*6.40)= 16500 UF Total DMCV=DMPV+DMQV 16500 UF=10100 UF+6400 UF b. Direct Labor Variances Direct Labor Rate Variance (Actual Rate/hr-Std.rate/hr.)*Actual hrs. (15.40-15.75)*2000= -700 F Direct Labor Time Variance (Actual hrs.-Std. hrs. for actual prodn.)* Std. Rate/hr. (2000-2080)*15.75= -1260 F Total direct labor Cost variance= (Actual hrs.* Actual rate/hr.)-(Std.hrs.*Std.rate/hr.) (2000*15.40)-(2080*15.75)= -1960 F Total DLCV=DLRV+DLTV 1960 F=700 F+ 1260 F c. Variable Factory OH Controllable Variance Actual VOH-(Budgeted OH/hr.*std. hrs. allowed) 8200-(4*2000)= 200 UF Fixed factory OH Volume variance (Actual hrs- Normal hrs.)*FOH application rate (2000-2000)*6= 0 Total Factory OH Cost variance 200 UF +0= 200 UF d. DM PriceVariance DM Qty Variance TDMCostV UF 10100 6400 16500 Impact on Income Decreases Decreases Decreases Possible reason Inflationary trends in the materials market Judgemental error in fixing the standard Recommendation to eliminate/reduce the variance Revising the standards Revising the standards

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