## Variances Analysis Practical Questions No. 1

Standard product cost card of a product is given 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 has been 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 feet = $15

Labor wage rate actual = $5.80

Factory overhead actual:

Variable = $6,200

Fixed = $12,000

**Required:**

Calculate two variances for each of the three elements of cost of production.

## Answer

### 1). Material Cost Variances:

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)

Material price variance:

30,400 – 28,500 = $1,900 (favorable)

## 2). Labor Cost Variances:

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 actaul 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 Variances:

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)

## Variances Analysis Practical Question No. 2

Following data relates to an industrial organization manufacturing a bousehold appliance.

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 |

Following calculation for variances have been made:

Material usage variance = | 2 kgs. @ $11 = $22 |

Material price variance = | 100 kgs. x $1 = $100 |

Do you agree with these calculations? If not provide a correct calculation for the variances.

## Answer

The above analysis of variances is not correct. Correct calculations are given below:

### Material usage variance:

Difference between standard quantity for the output multiplied by 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 No. 3

The following data pertains to the first week of operation 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 variance whether favorable or unfavorable.

(1). Material purchase, price variance and quantity variance.

(ii). Labor rate efficiency variance.

## Answer

### Requirement No. (1)

### 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 No. (ii)

### 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 |