Question : Variance Analysis The following standard cost data relate to the oper
ID: 2340386 • Letter: Q
Question
Question : Variance Analysis
The following standard cost data relate to the operation of Dragon Company for 2016. The standard cost per unit is based on the normal annual production of 15,000 units.
Standard cost per unit
Direct materials
4kg @ $5.00 per kg
$ 20.00
Direct labour
2hrs @ $12.50 per hr
$ 25.00
Variable overhead
2hrs @ $3.00 per hr
$ 6.00
Fixed overhead
2 labour hrs @ $5.00 per hr
$ 10.00
Total
$ 61.00
Actual production in 2016 was 10,000 units. The following data was obtained from Dragon Company’s records:
Direct material purchases
45,000
Kilograms
Cost of direct materials purchases
$ 202,500
Actual direct labour hours
25,000
Hours
Actual direct labour costs
$ 325,000
Actual variable overhead costs
$ 100,000
Actual fixed overhead
$ 125,000
Required:
3a. Calculate and show flexible budget variance for each cost item.
3b. Calculate the following variances and indicate whether they are favourable or unfavourable.
v.Variable manufacturing overhead spending variance
vi.Variable manufacturing overhead efficiency variance
vii.Fixed manufacturing overhead spending variance
viii.Fixed manufacturing overhead efficiency variance
Standard cost per unit
Direct materials
4kg @ $5.00 per kg
$ 20.00
Direct labour
2hrs @ $12.50 per hr
$ 25.00
Variable overhead
2hrs @ $3.00 per hr
$ 6.00
Fixed overhead
2 labour hrs @ $5.00 per hr
$ 10.00
Total
$ 61.00
Explanation / Answer
Solution 3a:
Material Variance
Standard quantity of material for actual production = 10000*4 = 40000 Kg
Actual quantity of material = 45000 Kg
Standard price of material = $5 per kg
Actual price of material = $202,500 / 45000 = $4.50
Material price variance = (SP - AP) * AQ = ($5 - $4.50) * 45000 = $22,500 F
Material quantity variance = (SQ - AQ) * SR = (40000 - 45000) * $5 = $25,000 U
Material cost variance = Material price variance + Material quantity variance = $22,500 F + $25,000U
= $2,500 U
Labor Variances:
Standard hours of direct labor = 10000 * 2 = 20000 hours
Standard rate of direct labor = $12.50 per hour
Actual hours of direct labor = 25000 hours
Actual rate of direct labor = $325,000 / 25000 = $13 per hour
Direct labor rate variance = (SR - AR) * AH = ($12.50 - $13) * 25000 = $12,500 U
Direct labor efficiency variance = (SH - AH) * SR = (20000 - 25000) * $12.50 = $62,500 U
Direct labor cost variance = Direct labor rate variance + Direct labor efficiency variance = $12,500 U + $62,500 U = $75,000 U
Solution 3b:
Standard hours of direct labor = 10000 * 2 = 20000 hours
Standard rate of variable overhead = $3 per hour
Actual hours of direct labor = 25000 hours
Actual rate of variable overhead = $100,000 / 25000 = $4 per hour
Variable overhead spending variance = (SR - AR) * AH = ($3 - $4) * 25000 = $25,000 U
Variable overhead efficiency variance = (SH - AH) * SR = (20000 - 25000) * $3 = $15,000 U
Fixed overhead variance:
Budgeted fixed overhead = 15000 * 2 * $5 = $150,000
Actual fixed overhead = $125,000
Fixed overhead applied = 10000*2*$5 = $100,000
Fixed overhead spending variance = Budgeted fixed overhead - Actual fixed overhead = $150,000 - $125,000 = $25,000 F
Fixed overhead volume variance = Fixed overhead applied - Budgeted fixed overhead
= $100,000 - $150,000 = $50,000 U