Practical Question 1
The standard product cost card of a product is shown below.
| Materials 2 feet length, 1/4 inch thick |
@ |
$16 |
|
$32 |
| Factory overhead labor 4 hours |
@ |
$6 |
|
$24 |
| Variable 4 hours |
@ |
$2 |
$8 |
|
| Fixed 4 hours |
@ |
$4 |
$16 |
$24 |
| Total standard production cost |
|
|
|
$80 |
Fixed overhead was based on 36,000 hours a year.
Total fixed overhead estimated at $144,000 per annum.
Actual data for a month has been ascertained as follows:
- Actual hours worked = 3,800
- Units of product produced = 900
- Material used = 1,900 feet in length
- Price per foot = $15
- Actual labor wage rate = $5.80
- Actual factory overhead: variable = $6,200, fixed = $12,000
Required: Calculate two variances for each of the three elements of the production cost.
Solution
1) Material Cost Variance
Standard quantity of output @ standard price:
900 units x 2 x $16 = $28,800
Actual quantity used @ standard price:
1,900 x $16 = $30,400
Actual quantity used @ actual price:
1,900 x $15 = $28,500
Total material cost variance:
$28,800 - $28,500 = $300 (favorable)
Analysis
Materials usage variance:
28,800 - 30,400 = $1,600 (unfavorable)
Materials price variance:
30,400 - 28,500 = $1,900 (favorable)
2) Labor Cost Variance
Standard hours of output at standard wage rate:
900 units x 4 hours x $6 = $21,600
Actual hours for the output at standard wage rate:
3,800 hours x $6 = $22,800
Actual hours at actual wage rate:
3,800 hours x $5,80 = $22,040
Total labor cost variance:
$21,600 - $22,040 = $440 (unfavorable)
Analysis
Labor efficiency variance:
$21,600 - $22,800 = $1,200 (unfavorable)
Labor wage rate variance:
$22,800 - $22,040 = $760 (favorable)
3) Factory Overhead Variance
Standard hours of output @ standard overhead rate:
900 units x 4 hours x $6 = $21,600
Budget for standard hours produced = 900 units x 4 hours = 3,600 hours
Variable overhead:
3,600 hours x $2 = $7,200
($144,000 / 12 months = $12,000)
Total = $19,200
Actual overhead = $18,200
Total factory overhead variance:
$21,600 - $18,200 = $3,400
Factory overhead volume variance:
$21,600 - $19,500 = $2,400 (favorable)
Factory overhead controllable variance:
$19,200 - $18,200 = $1,000 (favorable)
Practical Question 2
The data shown below relate to an industrial organization that manufactures household appliances.
| Standard quantity required of materials item 0020 |
1 kg. |
| Standard price per kg. |
$10 |
| Product in a month appliances |
100 kgs. |
| Actual quantity of materials used |
98 kgs. |
| Actual price paid |
$11/kg |
The following calculations for variances have been made:
| Material usage variance = |
2 kgs. @ $11 = $22 |
| Material price variance = |
100 kgs. x $1 = $100 |
Required: Do you agree with these calculations? If not, provide a correct calculation for the variances.
Solution
The above analysis of variances is not correct. The correct calculations are given below:
Material Usage Variance
= Difference between standard quantity for the output x Standard price
= 100 units x 1 kg. x $10 = $1,000
(-) 98 kgs. x $10 = $980 or 2 kgs. x $10 = 20 (favorable variance)
Material Price Variance
= Actual quantity used x Difference between standard price and actual price
= 98 kgs. x $1 = $98 (unfavorable)
Total Variance = $78 (unfavorable)
Practical Question 3
The following data pertains to a company's first week of operations in June 2011:
Materials:
| Actual purchased |
= 1,500 units @ $3.80 per unit |
| Actual usage |
= 1,350 units |
| Standard usage |
= 1,020 units @ $4.00 per unit |
Direct Labor:
| Actual hours |
= 310 hours @ $12.10 per hour |
| Standard hours |
= 340 hours @ $12.00 per hour |
Required: Compare the following variances to determine whether they are favorable or unfavorable:
- (A) Material purchase price variance and quantity variance
- (B) Labor rate efficiency variance.
Answer
Requirement (A)
1) Material Purchase Price Variance
| Actual quantity purchased x Actual rate (1,500 units x $3.80) |
= $5,700 |
| Actual quantity purchased x Standard rate ( 1,500 units x $4) |
= $6,000 |
| Favorable |
= $300 |
2) Material Usage Price Variance
| Actual quantity used x Actual rate ( 1,350 units x $3.80) |
= $5,130 |
| Actual quantity used x Standard rate (1,350 units x $4) |
= $5,400 |
| Favorable |
= $270 |
3) Material Quantity Variance
| Actual quantity used x Standard rate (1,350 units x $4) |
= $5,400 |
| Standard quantity allowed x Standard rate (1,020 units x $4) |
= $4,080 |
| Unfavorable |
= $1,320 |
Requirement (B)
1. Labor Rate Variance
| Actual labor hours worked x Actual rate (310 hours x $12.10) |
= $3,751 |
| Actual labor hours worked x Standard rate (310 labor hours x $12) |
= $3,720 |
| Unfavorable |
= $31 |
2. Labor Efficiency Variance
| Actual labor hours worked x Standard rate (310 hours x $12) |
= $3,720 |
| Standard hours allowed x Standard rate (340 hours x $12) |
= $4,080 |
| Favorable |
= $360 |
